Hello, I’m your host, David Barnard, and with me today is RevenueCat CEO, Jacob Eiting.
Our guest today is Phil Schwarz, Partner at Corazon Capital, a leading Chicago-based venture fund investing in early stage tech companies. Prior to joining Corazon, Phil served as the Chief Marketing Officer at Tinder during the rollout of subscriptions. He was also previously Head of Growth Initiatives at Match Group.
On the podcast we talk with Phil about the thesis behind Tinder’s monetization strategy, the importance of product differentiation, and why some companies shouldn’t use subscriptions.
Hey Phil, thanks so much for joining us on the podcast today.
Thank you for having me.
I’m super excited to talk about your role as an investor in seed-stage companies at Corazon Capital, but I think our audience would be pretty frustrated with me if I didn’t ask you a few questions about Tinder before we get to that, because you were at Tinder during such a pivotal time and in such a pivotal role at Tinder.
Even before you joined, you have a lot of insight into kind of the creation of Tinder as a product, so I’d love to hear your perspective on the creation of the product and at what point you joined into that story.
I’m happy to go through it all. I think I may still be catching up on sleep from those years, so you’ll bear with me. For context, by the way, I lived in Chicago at the time. Tinder is, obviously, based in Los Angeles, so I flew back and forth every week for years, which is what it is. No one likes that except American airlines.
So, Tinder; if we step back a little bit and think about the landscape of online dating, just for people that haven’t studied it a ton, there are three eras of online dating. The original era is Match Group, a pay-to-communicate platform, meaning you had to pay something to really do anything on it.
That is a 24, 25-year-old internet consumer internet business at this point, which is rare air. There are not many of those that exist, effectively, right? But Match, clearly being one of the early players/places, and there were some others along the way, eharmony being one of those, but Match became sort of the biggest.
Many years later, my now partner at Corazon Capital Sam Yagan and a series of other folks created OkCupid OkCupid was a free-to-communicate platform. So that was, you know, that was, many years after Match.com was created in the Web1 era, that broke the mold, by the way that was before freemium businesses were really a thing.
And, you know, everybody obviously questioned, could you create. How in the world, you can communicate against this behemoth name match, especially for dating and really for anything. I mean, at that point it was, it was early days. you’re talking, you know, mid-2000s So, so they create OkCupid and build it.
It becomes, certainly the, the biggest breakout outside of, of Match.com and Okcupid eventually gets acquired by Match.com Sam becomes CEO of Match Group, years later. Tinder is the, the beginning of the wave of the third era, which really is consumer mobile, and a continuation of what OkCupid created, which is this continuation of the freemium platform. So, you know, you had Match.com pay-to-communicate you had OkCupid Web1 really, you know, free-to-communicate And then you had Tinder come along that is mobile and free. And that required Tinder being sort of mobile and really.
You know what Tinder did beautifully. We can go into this more is go after a demographic that really had never been addressed with online dating before Match.com was an older demographic, 35 OkCupid brought that down a little bit, you know, more in the 30 you know, world, but Tinder.
Really went after the 18-to-24 demographic and 24-to-30 but 18 to 24, especially in a way that nobody else really had. in order to do that, you had to kind of invent a couple of things and what Tinder, what the, what the early folks at Tinder did. And I think it was a beautifully and Tinder for, by the way, for all its flaws.
And there are plenty. The, the, the secret of Tinder is that it actually does work like it’s, it’s re it’s actually. And, and by the way, I not, for everybody, it fails plenty of times, but it actually is a very efficient way to meet someone and I still get, and I don’t deserve any of this, by the way. I wanna make that clear.
I still get thanked by people. I still meet Tinder babies. I mean, it’s like a remarkable place to spend time because of the. The meaningful impact it might have on somebody’s life. So, but the P the product was beautifully designed. And what, what Tinder did was they obviously invented the swipe that we now know is the paradigm that it, that the modern mobile apps use swiping left.
And right, again, you can argue about, the flaws in that. And again, there are some, but I think it, it actually in many respects represents the
Know. I think I, I maybe Hot or not invented that actually. guess it swiping,
Right. There was no swiping, yes, exactly.
No, that’s exactly right. And I think, you know, what that did was reflect the way the human brain, again, rightly or wrongly quickly makes a determination about this person seems interesting to me or not.
That could be, you know, everybody has different criteria for what does that, but it, but it happens subconsciously. one of the reasons Tinder worked as well as it did is because the product, the early product represented. The way the human brain functions. The other thing that Tinder did was create a blind double opt-in system, which of course now is the standard where I can swipe right on someone, somebody can swipe right on me and only then does it create a match?
And, so tho those were two native Tinder innovations. Obviously it made it very graphic and mobile. the other thing that it did was allow you to start, basically create a profile and start swiping in 90 seconds, which was very different, very, very different than Match.com before it, but also very different than OkCupid, which had a series of questions that you would answer to inform, you know, its algorithm Tinder very quickly could get you downloading and swiping and that again, addresses the 18-to-24 demographic in many respects and it’s really those three innovations that drove the core initial growth and, and it was really a brilliantly conceived product, I think out of the gate, in that, in that sense,
Yeah And importantly, such a differentiated product to your point. It was so different than what came before and aimed at a different market. And, and it had all that viral growth. But then, so you joined in 2014 kind of. As the hockey stick was starting to take off. But then you had to figure out how to, how to monetize it.
So, so you were actually there for a lot of these conversations around monetization, that’s something I’m really curious about, because it’s famously one of the, the biggest subscription apps and early subscription app successes how, how did you all think internally about taking this free product that had.
That was differentiated that clearly had, you know, kind of product-market fit and that, was growing hockey-stick it’s just such an amazing place to be. And now you’re going to charge people There must have been some, some pretty crazy internal debates about how to actually monetize.
Yeah, it’s a, it’s a great question. And, just to set the scene by the way. So you think back to 2014, The, the product is starting to, you know, the product is starting to work for sure. it’s still the early days of the company. I think when I joined, we had under 20 people, so still very early days.
And what like eight, 10 million monthly active users, like
I don’t remember the Mau at that point. I mean, I, I also, by the way, I never know what I should say and not say, so I’m, I’m going to just not quote Mau, but it was, I mean, yeah, we had.
We quickly got to a like, user liquidity, at least in certain geographies. And, also remember that Tinder was effectively created inside of Match Group.
It’s a bizarre and unique, very unique story that I still have trouble figuring out what a parallel is to it. And, and I don’t want to go too far down the rabbit hole, but just for context, Match Group is the, is the dominant company. It also owns OkCupid at this time. So there are the two incumbents.
That Exist within the same company as the disruptor and it, and because Tinder was free. you had all this mind share and all these users going to Tinder the free product. then you had the, cash generators of the, of the parent company, wondering what, what is happening and how do we bridge this gap?
So you had an internal dynamic around monetizing Tinder that, that put pressure, on, on the early Tinder, folks. That rightfully we resisted for the right amount of time. So, so like that’s the first piece. The first piece is we let the company become a company. And, and I, I, I I say we, but I, give credit to many of the people at Tinder at the time in, in doing that and to management at, at Match Group in allowing that to happen, then we got to a point where, okay, you know, we’ve got liquidity, we’ve got product-market fit.
Let’s figure out how to monetize this. The The fortunate part is online dating is one of those businesses where, you know, if you get to, to scale, you can monetize. we had the, we, we understood the precedent for Match.com We understood the precedent from OkCupid. We knew that, you know, this is one of the pieces of the consumer internet that consumers are willing to pay for this, again, this is back in 2014 when as consumers, way less subscription was there than we are today. Yeah. So we knew that that. Was a possibility we wanted to wait until the right time. And it’s, it is so interesting. Like looking back at the time that, that we were debating it, there was a lot of conversation around how upset users would be with us for monetizing the product, how the kind of internal culture of Tinder, you know, would change, or had to change to, to be not like hesitant to monetize.
Cause we, you know, I think out of the gate, When you have a free product and then like you today, and again, today is different. And so founders that I think have come along in the last 3, 4, 5 years may not actually understand this mentality, but at that time we were worried about monetizing the thing.
Not because we didn’t think it would perform, but because we thought once somebody sees a paywall in Tinder, what, you know, after they’ve been using it for however many, you know, however, however many months at this point, you know, for free, what would their reaction be? it wasn’t like everything was out of the gate monetized more the way it is today.
We had to Coach the internal. Team around a mindset of monetization. that is, looking backwards, almost funny, but, but at the time was a, very serious thing. and we had a lot of conversation around whether we do, we make this a subscription business or not. That was a lot of the topic of conversation, obviously Match.com and OkCupid both subscription. Okay. Keep it more a freemium subscription and add-ons. there was a lot of conversation about whether this demographic this 18-to-24 demographic would sign up for a subscription to an online dating product. Because it was one thing to believe that they would ever get on an online dating product and that we had done.
Now the question is, would they pay, pay for this? And this is, you know, again, it’s pre. now, it all seems very obvious. Everybody’s got subscriptions, you know, falling out of their ears, but back then it wasn’t so obvious. so we had a lot of debate about that. And, there were two camps, there was a camp that said we should create à LA carte revenue products, because that is the way that people are used to paying and it better matches their expectation.
Then we had a camp that said subscription is absolutely the way to go. Obviously that second camp won out. And not only did it win out as you know it, has become a, you know, $1B+ revenue business over the course of many years. So it, it created a foundation for us to build on top that I think had we not done it that way, would’ve made our lives much more difficult you know, and as you know, it, it.
Generating revenue then allowed us to obviously reinvest back into the product and innovate in other ways that were ended up being good for our users. So that that’s sort of the, but it was a, it was a fascinating and very interesting time. when, when we were in it,
When, where, where was this in terms of years? Like what, what about time were you launching this?
This was so we had really started talking about it in 2014 and we lo we launched most of it in 2015.
Not in every geography and not in its fullest form, but Tinder plus itself was a 2015 release. And, you know, it was, and we were, I think we were pretty smart out of the gate about testing it in various ways, to ensure that it was resonating and that it was converting the way we thought it might convert.
But it was, you know, you’re talking 2015, so 7-ish years ago, which is
Yeah. I mean, it’s just, it’s interesting in terms of that, getting that young. Well, one thing I wanted to point out, it’s very odd to have a technology being dating software that gets adopted by an like. Older user base first, and then you’re pushing the adoption curve younger. That’s a very, I, I I can’t think of too many products that have to force that way.
So that’s an interesting constraint. and you wouldn’t think about it that way, unless you were IAC and you add a portfolio of like hitting those. Right. but then the, the, the, the timing is really interesting because that was around the time apple was like, okay, we’re going to open up subscriptions.
And this concept of getting that 18-to-24-year-old set subscribing. , you know, you might have just hit it at the right time. That apple was like, Hey, here’s an easy way that these folks they’ve, they’re buying, they’ve been buying apps since they were kids. Probably they have some sense of how this works. They have it loaded.
It doesn’t feel as gross as getting your credit card out and typing your numbers in. and so like right time, there, wasn’t another moment in history where that would’ve all lined up
Listen, I think that’s a hundred percent true, both in terms of mobile consumer mobile adoption, you know, just, we were still on the upswing, you know, we’re still on a, me. obviously the iPhone is, a 2007 product, so it, it had been around, but it was, we were still on very much on the upswing in do in adoption.
And you had the introduction of, of very seamless payment. You know, software. So it unquestionably is, is, connected I think.
Do you remember back then? what some of the early paywall features were kind of, I mean, to me, this is the, the, the perennial. Conversation any subscription app needs to be thinking about and continue thinking about what goes behind the paywall and what’s in front of the paywall, or, for some it’s, a hard paywall where there’s nothing and you have to start a free trial, but most subscription apps now are, are finding some blend of freemium strategy, but it’s so hard to, to, to figure out what to give away and balance that free to paid and make sure they understand the value they’re getting.
So I’d love to hear your thoughts and how the team. Worked through that challenge of figuring out the freemium strategy.
Such a great question and something we talked actively about for framing. I, I will frame it this way in terms of like the philosophy. I think that we had going into how to, how to figure out what to monetize. And I would say a couple, one, one other framing element when we looked at the behavior on Tinder and, and when, when like the, the initial product was created, as we talked about, it had a blind, double opt-in system, which is a brilliant way of, of sort of fleshing out mutual interest.
The problem with that was, not everybody was using it the way that we hoped that they would use it, which is to swipe honestly, if you were to guess, you would probably guess that guys might be like straight men would be the ones that would use the product differently than you might expect in that they would swipe right.
A lot. And that. Should surprise, no one. but, but, it’s something that we didn’t necessarily build for out of the gate. So, one of the things we did right around the time that we monetized the product was limit the amount of right swipes you could make in a day. And we took a pretty hard hatchet to it.
At the beginning, you know, pre-monetization you could swipe left and right, as many times as you wanted in a given day. But again, that, that had the side effect of creating this you know, unintended behavior. So, what we did is we installed, a limit on the number of times you could swipe right in a day That ended up becoming one of the key, dividers in the paywall that’s piece number one piece. Number two is the way I think about it. And this is not to, minimize the importance of dating in somebody’s life. But it’s to say, when you think about product design and paywall design in a two-sided market like this, I think oftentimes you think about it as like, okay, let’s say, let’s say Tinder is a game.
And how do you think about what to charge for, or not charge for? Well, what you charge for is things that break the rules of the game, that if everybody were doing them, it would ruin the experience across the ecosystem. But if a few people were doing them, you would generate revenue and it would create an honest balance, a, a more honest balance in the ecosystem.
That is how we generally thought, at least in the things have evolved over the course of time. But that is how we generally thought about where to place the paywall and where not to. I bring that back to the example I gave you before. In swiping right on an unlimited basis. That is not something you want people to be able to do.
It turns out, you know, everybody to be able to do, because it creates a, a less, effective ecosystem for everyone. But when you install a paywall it makes people think twice about it. And the people that are really high-intent and and that really want to do this, they pay. And that is, that’s like a, a good paradigm for how to think about it.
So, you know, one of the early, product elements. Went into kind of Tinder plus was the ability to, to break through that limit on, in the course of a day. anyway, so that worked, very well. The other I’ll give you another example is passport passport was a product feature created that allowed you to effectively change your location.
So, you know, Tinder is, as, as I think everybody knows at this point is based on a radius of where you are, you know, your, your search radius is limited to kind of some, proximity to where you are. If we let everyone in the world change their location and be anywhere, it would mean nobody would know who was actually around them, which would then, I mean, and, and remember the ultimate goal of Tinder is actually for you to get off the product and meet somebody in real life.
So it has a, you know, I think. what I consider a very, you know, ideal aim. Again, doesn’t always work out that way, but that’s the ideal aim of Tinder that doesn’t work. If everybody’s spread all over the world and you’re matching with people that aren’t anywhere near you. So passport became an element of the paywall, which is okay.
If somebody actually really wants to do this because they happen to be going on a trip in a few months or, and they wanna match with people before they get, there was a very common use case. That’s an okay thing to do. It makes total logical sense to charge for it, because if everybody, if we gave this to everybody and let everybody do it anytime they wanted, that would hurt the ecosystem.
If we had a, a percentage of people doing it, it allowed us to generate revenue and flesh out where, people had real intent. So those are a couple examples of how we thought about it. And I, and I think the paradigm of how we thought about what to place behind the paywall and what to place in front of it.
It’s really interesting. and when you have a system like Tinder, which you describe as a game, I couldn’t think it’s quite literally right. Like in, so I’m like, I’m sure there’s a way to represent it as game theory and,
There’s no question. It just, it just matters a lot to people. So I’m very
Not minimizing, like
It’s all a game, you know?
Right. Exactly. Exactly.
It’s very different from a lot of the, more personal, more isolated mobile subscription apps that are, generally.
Content based, right? Like it’s a different, it’s a whole nother dimension of thinking. Right. And actually maybe in some ways simplifies it. Right. Cuz you can kind of decide like what are behaviors we need to like discourage or put behind a, a paywall and like you’re controlling an ecosystem in some ways or managing an ecosystem versus you know, some content based meditation app or something of the along those lines, where it’s it’s is a different game.
So if you have something like that, that actually maybe in some ways more complicated, but does like, Give you a little bit of guidance in terms of like, how can we, yeah. How can we, how can we use monetization to control, to control behavior, which is like, is what the government does. Right.
Yeah. Oh, no question. I mean, it’s, it’s just, it’s just straight economic theory at the end of the day. And look, I think if you’re running a con and this is, I guess maybe I’ll put my investor hat on for a minute. If you’re running a content based subscription business, then like, listen, it’s just. It’s so much more about, you know, understanding your customer and just raw optimization.
Right? I mean, that’s like, that is just the science around it. We, you know, and by the way, there’s like many layers to that. we’re an investor in a, a company named brilliant, brilliant.org. the founder Sue. To, to, I guess, use the word brilliant founder. And this is not even one. I, I would take credit for my partner.
Sam has known Sue for decades at this point. but they are a stem subscription. They’re a, they’re an, they’re a stem subscription, or education platform that, that monetizes through subscription. And they have done a brilliant job to use the word one more time of. Understanding, not just how to place things inside and outside of a pay wall, so they can take the dollars and reinvest in great content for their users, but also to figure out how best to, how to optimize for the user’s preference on a subscription period, annual versus quarterly versus monthly, which is a science unto itself.
You know, so there are, and that’s a, that’s just a pure content monetization business, but I think that that one is really just about the product that you have. Why people are going to engage like the, the frequency with which people are, going to engage with that product, why they’re gonna come back to you and how they would prefer to pay you for that.
You know, it’s, it is really nothing more than that. So, so I think you just need raw analytics and like rapid experimentation to understand, you know, where you fall in that cycle. And you can obviously borrow ideas from other companies, but you know, a lot of it has to do with just rapid experiment.
You’re probably less likely to get really fun and interesting unexpected side effects as well. Like you would with an environment like Tinder, right? like you can’t change one little thing
The ripple effects. yeah. The ripple effect is much, is much more limited, thankfully. Yeah. That’s very true for better or worse, I suppose.
In all that thinking about your customer and the, and the monetization strategy. Your role was CMO. And one of the things Tinder did really well was to align that user acquisition strategy to that monetization strategy. So what, yeah. What was your thinking as CMO? Like a lot of CMOs aren’t quite as deep into the weeds on all this.
So it, it kind of speaks to how you, how you all operated that you were so in the weeds on the monetization side, but your role was user acquisition. So how did, how did you blend those two and focus? Acquisition around that monetization strategy.
Great question. So. What was interesting. I think about stepping into Tinder when it was like just hitting its inflection point, was we, and remember we were free. We had no monetization at all for a long period of time. And as a function of that, we were very careful on budgeting. Like we, the team collectively did a masterful job of, Organizing around very efficient channels of awareness, meaning we understood very quickly that Tinder because it was a dating product, and was mobile.
And there was this sense that everybody was on it or everybody was going to be on it. And there was FOMO around not being on it. We understood very quickly that the press would cover a variety of things about the company or about the product and Not every single day, not a, not a sort of daily drum beat, but if we could create sort of a periodic drumbeat of information that we could stay in the media.
And we had looked by the way to OkCupid before it, which had, you know, a freemium product and therefore a limited marketing budget and figured out how through very data driven blogs
Think they invented that actually didn’t they, like, I don’t know of anybody who did it before them.
No, I, I think that’s right. And they wrote a very data driven blog that the press, and oftentimes the results would be controversial.
And they said, we’re just gonna publish the results. And the press would pick that up and write about it. Some would say, look at the, look at this craziness that okay. QPI is, is, you know, you know, they, okay. QPI did a blog on whether it’s own users were racist based on the data as an example. So like very controversial.
I think that’s the one I remember being exposed to it. Right.
Exactly. Very controversial. So we, so we, we sort of knew. We had learned from that playbook or observed that playbook. And we sort of knew that if we, and then, and that exact approach didn’t make sense for Tinder, but there were approaches that did. And we figured out how to kind of leverage media on a, on a global basis, actually, just because there is a bit of an echo chamber in the world of media that if, you know, one writes a story, it can get picked up and, and moved out.
And we very quickly understood, I think, how to, how to handle that. Both the marketing and the PR teams. And so we would go down that road and then I think, When it came to like connecting monetization to marketing, when we introduced super like, as an example, which is. a paid feature that allows you, again is fascinating.
Like I think a brilliantly conceived product feature that allows you to set, you know, by default gives you, gave users one super like a day, so I can swipe left and right. as I like throughout the day, I get one super like a day by default to send to somebody. And that has, again, these, these sort of the consequence, as long as people understand it, of the recipient.
Knowing that, okay. Somebody used their one, one a day super like on me, and it moves you to the top of the stack and all these things. And so again, a brilliant conceived product, but the key was that the recipient needed to understand that there was only one a day. And so we actually created, both a marketing campaign around it, but also, that, that went outside of the Tinder product.
But also. We actually effectively created a branded, profile that we could introduce into the product that would market the product features that gave marketing basically a connection into the actual product, which we didn’t really have before. I mean, it all sounds like easy in hindsight, but the reality is like, when I got to Tinder, because things had happened so quickly, there were, there was very little data.
There like we, we did not have a good organization of data. We did not really have hooks between marketing and product at all. So, and we did not have life cycle marketing at all. We did not have CRM at all. I mean, other than like something hard coded somewhere in the product that basically told you when you got a match, that was like it.
And so we had to do like, you know, we had to hire, we had to do a lot of work to get those things in line. And when it came to introducing super, like, we leveraged those things to get the message out to users that then drove, you know, the recipient to understand this is a, once a day thing.
It made it special. And as long as they understood it, it would perform for the users that sent the super like, meaning their match rate would go up as a function of sending a super like, and that would drive then further monetization because we. Introduce super like as a, as an ALA card feature on top of our subscription, eventually that allowed you to buy more super likes.
And so all of those things got connected and all of those things worked very, very closely with one another, but it all started it all required education of the users to understand it both on the sender and the recipient side of the equation.
Wow. Yeah. And, and Tinder’s monetization has always been so fascinating to me and it it’s all starting to make sense. Now, when you think about it from that kind of game theory perspective of like, Super like is breaking the rules. And that makes sense why that’s a paid feature. the profile boost is kind of breaking the rules.
You get more attention than you otherwise would. That’s a paid feature. and I haven’t looked at the, at the paywall recently, but, but yeah, framing in that content, it’s just so brilliant and makes so much sense how that kind of strategy evolved over time. on the data piece. It’s interesting. Cuz y’all were operating at a time when, you know, things like revenue, cat didn’t exist.
Braze was probably like just getting off the ground. Talking to your portfolio companies today that are trying to ramp up subscriptions. Do you, do you think it’s like much easier today or like what, how would you advise folks differently kind of having gone through this slog of, of, of not having tools and, and things like that available to you at the time?
Yeah, it’s a great question. I’ll tell, I’ll tell you a quick, funny story about the lack of tools that we had and the, and the result, the result of that. we sort of invented a product at, at some point, which was called swipe surge, which, you know, because we observed, we found once we. Understood the data.
We understood that the more people that were on Tinder at any given time, the, the higher, the collective match rate got meaning it’s, it’s very logical, but we wanted to prove it out in data. If you’re, you know, sitting and I’m sitting in Los Angeles, if a bunch of people, all of a sudden get on Tinder in Los Angeles, everybody’s match rate actually goes up collectively because everybody’s there swiping actively.
And so, you know, you’re seeing more recent matches. Engaging more, you know, et cetera. So it makes sense. We saw it in the data and then we sort of created this product called swipe search, which would do that on an automatic basis. Meaning it would let you know when there was a lot of activity in your area, because it was good if your goal on Tinder was to match with somebody, then that would increase your odd just by default, by the activity alone would increase your odds.
We didn’t have a lot of. You know, products that exist today. and this was a, a, a sort of marketing product sort of hybrid approach. So I, I, and another guy who’s named Jeff Morris, who now has a venture fund and has gone on, spent a lot of time in revenue product that’s entering, did on went and has gone on to do many great things and run his, runs his own venture fund.
Jeff Morris and I, set up to sort of initiate swipe surge. And by accident, we sent it to everyone. Meaning we, we meant to test it in a geography or two to, to initiate a test in, in a geography or two, but we unlocked it somehow across all geographies. And so, you know, it still worked the way it should, meaning there was swipe surge happening, but, it went to every geography and we crashed Tinder.
It was, we had a, an amazing increase in daily actives as a function of that, but we also, we accidentally crashed the system and we got, we got a lecture from the ops team that day. but anyway, I think had we had more robust tools. These things would’ve been easier, but, but a, I mean, I guess a successful experiment, nonetheless,
That with a robust tool. I’ve seen it. So
There’s no question, but yeah, we, we sort of late night in the office one day accidentally went, went rogue.
You’re not running a consumer product. If you haven’t Dedos yourself,
That’s fair enough. That’s fair to right.
A successful consumer product. If you haven’t Dedos
If your ops team is not yelling at you every so often, you’re probably not pushing, pushing hard enough.
So, anyway, when I look at our, when I look at companies today, we look at, we have a bunch of subscription companies in our portfolio. When I look at, you know, I, I talk to new ones all the time.
Look, I think, there was a period of time where I think everybody was trying to turn everything into subscription and. I found myself giving feedback very frequently when I was meeting with founders that like, this is just not a subscription, but like subscription is, as you guys have covered in your podcast over and over, it’s a beautiful business.
If you can get it right, like it’s beautiful. It’s the revenue rolls in. It’s recurring, it’s predictable. It’s all the things. So there was like this overcorrection, I think when people saw that and were like, oh, this is great. You know, I don’t need to deal with rebuying my customers. but it went too far.
Like I looked at subscription for. You know, purses and for, you know, like things that
Oh, yeah. Especially in the physical world. Right? Like the, like some of the stuff got crazy for a
Some of the stuff got totally crazy. Exactly. And we, and we have, we have been lucky in that we have, we have back founders that have figured out that model. Like we, one of our portfolio companies is company pretty litter. And it’s a subscription cat litter that is also also health detecting. So it’s innovative, in that if the cat pees on it and, one of a few things is wrong with the cat, it will change color.
So it’s like it’s an innovative product. It was also crystal based, 80% letter, traditional litter. It shipped very cost effectively. And the founder Daniel Rotman did just a remarkable job building a subscription business on the back of it. The reason though he was able to do it is because litter is almost the perfect subscription product.
It is exactly predictable to consumption. The next one bag shows up, you throw out the
Yeah, phys, I’m thinking of physical good subscriptions. I have that I’ve kept is like my lunches and, coffee, because exactly that I, I eat five lunches a week and I drink coffee seven times a week.
It’s exactly right? No, that, that’s what I’m saying. So when the, when the consumption is not variable, subscription works extremely well when the consumption is variable or unpredictable, it works horribly bad. And, and you see this by the way in the data with. You know, some of the food subscription businesses that are more like meal kit prep,
Yeah. I mean, it’s variable, right? Like you have a week, you just can’t do it. And then the whole thing falls
And then what do you do? You go into your fridge, you take out this big stack stack of food that you have to now throw away.
There’s a special sound that rings in your ears. When you hear it dump in your trashcan of just
That’s well said. Yeah, exactly.
So anyway, I think we went through that period and I think we’ve come out of it. pretty well in that I don’t, I don’t, I get less of that now.
But I, but I think like there’s still a hesitancy, I think, to monetize early for companies that I think the current. I suspect the current venture market, which has, you know, as of the time that we’re recording this, I suppose, so we’ll market for posterity has really turned around, meaning it is, you know, it was very high flying for a while.
We’re early stage investors at Corson capital. So we do, you know, we’ll do, there’s nothing too early for us. We’ll do prey, we’ll do C we just wanna have conviction in something. so we haven’t seen a lot of this yet because we’re not, we’re not doing kind of growth stage, but it’s coming and the, the like reconciliation is coming.
And so. Profit is effectively the new growth. So, so for a while, companies wanted to grow so fast that they didn’t wanna think about monetizing their product or were worried to do it. or just didn’t prioritize it on the roadmap. And I think we’re coming out of that. I think what’s going to happen now is people are going to really have to think about delivering value in a subscription.
If it, if you’re running a subscription business value early, because. It’s much cheaper to fund your growth from your customers than it is from the venture market. And that wasn’t always true because the venture market cost of capital used to be very low and is now very high, all of a sudden, and is increasing still.
So I think, you know, companies that are starting today really need to think about that. And then the other thing I would say is they’re oftentimes the thing I see is. That the marketing strategy is totally disconnected in economics are totally disconnected from the pure monetization of the product.
Meaning, we see pitch decks all the time that have a lifetime value that when you know of, whatever five year lifetime value where it’s not really a lifetime value, because it’s just GMV and you’re, you know, you’re taking whatever a 1% take rate a 10% take rate. So your lifetime value is actually.
One or 10% of the number you’re showing me. And so I always encourage startups that really think very honestly about what your lifetime value of a customer is in terms of gross profit contribution, and also be very thoughtful on your payback period. Like, you know, we see a lot of pitches that have a lifetime value of big numbers, but it turns out like you’re not gonna get paid back for two years.
And so your working capital cycle has a massive deficit to it. Like you, you will, you will run out of cash every like three months. You’re funding acquisition. You’re putting out a dollar into the Facebook and Google machine and you don’t get that dollar back for two years. So like, I think that is a, that is a place where I see a lot of disconnect very often.
And you know, again, I would take you back to the world of online dating. OkCupid knew they didn’t have knew they had a freemium product and they knew they were model, you know, converting a percentage of those users into paid subscribers. And so they had a marketing, you know, their marketing budget was nothing.
They, they, it was their brains. They would. A blog at Tinder in the early days before we monetized, we were very careful on marketing spend because we knew we didn’t have real profit, but you know, companies for a number of years have focused on growth and not on profit. And they’ve got to move back in the other direction at this point.
What as a, as a pre-seed like very first, probably first money in, right. Like investor. Are you. As a, as a B2C founder, it can be very hard to get those numbers down without some amount of, you know, play money, you have to spend to figure out. Do you think, do you think founders should be in this environment and yeah, by the time this goes out, maybe the environment’s different, but do you think in this environment they should be trying?
Cause I I’ve I’ve I’ve I’ve worked with, You know, subscription app founders, who are super, super early, and who are like, we’re trying to get our LTV/CAC lifetime value per customer to cost of acquisition and I’m like, Hey, just get some subscribers and talk to them. Like, let’s do that first. Right. Do you think that, that, that, that should move earlier even that people should be doing this, like in the first like couple of hundred subscribers stage or how does, how do you actually navigate that as a founder in the very early stages?
So, so it’s a, it’s a great question. It’s a great nuance too.
There are certain businesses for which. The question of whether people will eventually pay you for this thing is not really a question. Again, I would put Tinder in that category. We like, we knew if we got to like user liquidity, people would pay us, how much would they pay us?
What percent would convert? Those are variables for sure. Whether they would pay us. We had precedent that we looked to and said, we know that people are willing to consumers are willing to pay for this. There are other businesses that are inventing things where. the Idea that people will pay you for them is not inevitable.
For those businesses, I would argue that they need to tackle the question of whether people are willing to pay you for this thing very early, because if they’re not, then you’re gonna kick the can down the road. And eventually somebody will figure out that no, one’s willing to pay you for this.
And you know, either that’s gonna be the market or it’s gonna be you, but either way, it’s not.
A lot of metrics go up before you get to that one. Not being able to, right.
That’s exactly right. So I think, you know, again, like I think,
I think it depends on the business, but if you have like absolute, certainly that, even that if that the thing you need to accomplish is whatever you need, this much of a library of content, or you need this many users on the, in the market or whatever.
And then once you hit that point that people will pay. If you have ultimate confidence in that, then you know what, like I’m with you get, raise what you need to build to the thing that allows you to then monetize. If you don’t have confidence in that. You know, raise what you need to start to deliver a monetized product because shielding yourself from the inevitable question of whether somebody will pay you is very harmful to a founder.
I mean, it’s just a very dangerous place to be. And like, I try to be like very direct and candid with founders because they’re the ones putting their entire lives into this. Like, you know, I don’t have to tell you like, it is. Insanely hard work. Like we, you know, being a founder gets glorified because there’s winner’s bias and whatever, but it is very hard
We made $90 in the first six months. It was great.
Right, exactly. Right. It’s, it’s extremely hard. And so I try to be honest with founders and tell them what I think they are probably a little bit scared to hear, but that is the reality situation, because I don’t wanna see. The worst thing is when you see a founder that is putting their entire life into something that you just know is not gonna not going to be able to succeed.
And of course they’re gonna learn things from that and everything else, but boy, if I can save them six months, either by saying, this is not gonna work and I’m gonna do something else or by saying, here’s the fundamental question you should answer now. Like that, that is what I, whether we invest in a company or not like that is what I try to do every single time as an investor.
It’s a convenience of the time we’re in going back to the tooling thing that the, the data and support tooling has compressed and become more accessible. Because 10 years ago, it was much more like the Tinder path. Hey, get, get active users on something we know you can monetize later was very much the advice I’d heard at the time.
Now you have access to, you know, the, the acquisition through Facebook and you know, many, many more tools to do what you were doing. post-scaling at Tinder with a big team and you were building tooling and all this stuff. Now you can do as a team of two or three founders, If you’re technical. and, that has probably changed structurally just how this whole thing probably for the better, Because we can, we can skip some of that, guesswork.
It’s a great observation. The amount you’re able to do now without the number of employees required or, or said differently, the revenue per employee in some of the companies that I’ve seen is like, is remarkable. I mean, pretty letters, revenue per employee was extremely extraordinarily high.
So it, you know, as an example, so, Yeah. The efficiency that these tools have created is just frankly remarkable.
I mean means the whole system’s kind of working, right? Like capitalism in general. Like , we’re building better tools, making it cheaper.
That’s exactly right. That’s exactly right. And I think, and now the, the flip side of that is the like world of iOS 14, as it relates to,
As it relates to like acquisition has really put our, put a dent in the, the acquisition ecosystems in the consumer companies. I mean, in all companies, but consumer, especially, and just for maybe people that don’t understand, iOS 14 came out very privacy focused, sort of killed a lot of the tracking that especially Facebook has, that then gets reported back to the companies that enables them to, to understand how their marketing is performing for just in very basic terms.
What we BA what we basically saw as we looked at companies across, you know, the ecosystem is almost all of them had immediate spike me, meaningful spike in cost of acquisition of a customer and some of them so much so that, you know, and I bring it back. The companies that were playing this game of oh, were like, Our payback period is two years.
And like we’re really thin on margin and we’ll worry about profit later. Those companies got really host. They went upside down very fast because they had assumed a cost of acquisition that was here. That was at one level and it was much higher almost overnight, and it exceeded the gross profit they were ever gonna make on their customers.
And so it really has, I think that also started to force. Especially consumer companies to think a bit differently. And, and I think it’s actually in some respects, lucky that it predated this like bubble bursting in the venture market, because it for it has forced companies to some extent, to think differently and to be more disciplined.
Mm-hmm yeah, we had we this last year, when all this was going down, we had a bunch of. Folks and talked about the technical aspects of it and kind of we, at the time, what sounded like a very doomsday prediction, which was like an app store recession essentially, felt like a little bit sky has felt chicken little.
But I, we haven’t done like a broad based study of our data, but like, anecdotally, it’s kind of what happened. Like, the, a lot of businesses that were on the bubble just can’t exist now and maybe you’re right. Like maybe it. You know, we were in a time with the fundraising market and potentially with the like tooling we had, where there was just like a class of business that could exist, that wasn’t durable really, really all that durable.
Yep. I think that’s right.
And then the durable companies are having trouble scaling as fast as they were in the pre ATT
Yeah, it was, it’s not helpful for them either. I don’t think it helped anybody.
No, no. It hurts everybody. And, and I listen, I would also say, it has become harder. I think, to get a D to C company really off the ground into scale because the, because the pipes have gotten so crowded and you have iOS 14 and everything else. And so. it is not the easiest thing in the world to pull that off, meaning the tools have gotten more efficient, but the trade off in everything getting more efficient is like the pipes get really crowded and you, you know, your com your competition goes up and, you also have to like, really think deeply about the raw cost of acquisition relative to your subscription.
That, you know, if you’re gonna run a subscription business, the value that you’re creating on the other end, and that, and really be honest with yourself about churn. and remember, by the way that your cost of acquisition is just gonna go up. Like that is the thing, like people, I think all the time, make flawed assumptions about being able to hold cost of acquisition somewhere.
And you know, when I look at companies that have done really well, what they have figured out how to do is move LTV of a customer higher in lockstep with cost of acquisition. Like that is the game.
So like calm or whatever, the, the late stage
Calm is an example, you know, like, the companies that do really well, figure out what are the product features I can add to either retain customers at a higher rate or charge more money or whatever, to drive my lifetime value higher.
So that when my, when my cost of acquisition comes up, I’m still holding whatever ratio I need to hold.
It’s interesting. Cuz you would think there’d be with brand and things like this, that there would be some efficiencies, but they probably get wiped out just in the fact that you’re always gonna buy the easiest to buy users first. Right.
There is unquestionably. A brand element to it, but I think people mix up brand and product a lot. Meaning like, there are plenty of brand like things that I subscribe to and I like what they’re doing, but if all of a sudden they changed what they were doing and sold and sent me like crappy products.
I’m just going to CA as much as I like the brand, I’m still going to cancel the, the subscription. Like I, you know, so brand yes, but. It really is product first. Like, I, I, I, I think that is the way to think about, and, and that is sort of, as it should be. I mean, this is capitalism. Like, you know, you, you,
Keeps their calm subscription if they’re not really using it or intending to
It’s exactly right. I could listen to LeBron J I mean, I grew up in Cleveland so I could listen to LeBron James all day long, but you know, if I get in a calm. Thing. And like all of a sudden it’s like some offensive recording, or something like that.
I’m just gonna, you know, I’ll just cancel it as much as I like calm.
Yeah. And, to switch gears cuz we are, we are kind of wrapping up on time. I, I did wanna get the, the, you kind of touched on it a little bit, but. I wanted to hear more about give us the elevator pitch since we’re we only get a couple minutes left of course, and capital. and then are you currently accepting pitches and how would, how would people get in touch with you for that?
Yes, we, every, every day is the answer to the question. look, we Corone, capitals on its third fund. We closed a fund 134 million fund in November of last year that we started investing in January of this year. we are very much ex operators turned investors, as you probably can tell from the conversation.
And that’s just the way we think about companies and, you know, unsurprisingly, we tend to invest in things that we understand and know how to do. we, there, we feel like that’s where we can be most helpful to founders. So that includes marketplaces subscription businesses. D TOC e-com is D to C e-com.
We do do some B2B, as long as we can really understand the pain point that it’s solving and really understand the end actual the actual customer. so that’s what we do. We’re early stage. We invest generally on a, we’re we’re early stage and we’re high conviction. So we’ll invest enough to own eight to 10% on a first check, because I think our founders, I think because we come from the operating world, want to spend time with us.
And if you spread yourself too thin, you can’t spend time. You can’t spend meaningful time with anybody. So that is how we, that’s just how we do things. you know, we are, like I said, more consumer than B2B, but we do do both. how do people get in touch with us? LinkedIn is probably the easiest. To be honest.
You know, we’re actively investing and, there’s nothing too early. I think for us, it’s a matter of getting conviction on, on founder market and product really, actually in that order. And, And if it’s a space that we, if it’s like a business model that we understand a space that we understand we’ll get conviction, even if it’s a PowerPoint deck.
So it’s not, you know, we’re happy to go. We’re happy to go really early.
Yeah, I, I was mentioning before the call, the, that the fact that there, there are not that many, well, two things, one, there are not that many. early stage funds that focus on subscription consumer exclusively are very focused. So like that’s pretty unique. And then also run by operators, I think is, is always nice to have, I think in general, as, you know, if anybody considering taking venture capital, like you don’t have to exclusively raise from folks who’ve operated businesses, but that’s where you’re gonna get the most additional leverage out of, you know, selling off some equity.
So, Definitely the right kind of folks to add.
No, listen, I appreciate you saying that.
I don’t know if there’s a right or wrong way to get into venture. This is just the way that we know how to do this, it’s what we’ve done and how we know how to do things. And I think, to your point, if I’m advising a founder, whether it’s us or somebody else, having people that actually fundamentally understand what you’re building and can roll up their sleeves and help you.
It’s all very easy when things are up and to the right. But when things go wrong, who do you text? Who do you call? Because if it’s a non-operator investor, they don’t really wanna get that text from you. Whereas we’ve been in the trenches. Things go wrong all the time. Again, whether it’s us or somebody else, just be thoughtful about how you construct your cap table, and never underestimate the duration of the marriage that you’re entering into.
Especially for pre-seed. Right? Like those are the people you spend the most time with if you’re successful.
A hundred percent, a hundred percent. So just think deeply about who you want on the cap table and what compliments they provide. I love the early stage, because it’s pretty collaborative, generally. I mean, much more so than the later stage as a venture community.
So we think all the time about how we can construct a syndicate for a company that is one plus one equals three. We play the role that we play as X operators and very tactical. But we have funds that we like to work with that play different roles.
Well, I wish we had you for another hour, because there’s so much more we could talk about. With that, we do need to wrap up. Thank you so much for your time today. So many fascinating conversations and things to learn from.
Thanks Phil, for being on the podcast.
It was my pleasure.