Building the Berkshire Hathaway of Consumer Subscriptions — Eric Crowley, GP Bullhound

0:00hello I'm your host David Barnard and with me today Revenue cat 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 B2B opportunities for b2c apps the App Store alone being bigger than most Fortune 500 companies in which current or future company will build the Berkshire Hathaway of consumer subscriptions hey Eric thanks so much for joining us on the podcast today thanks David Jacob always nice to have you joining us as well I'm great somebody told me I was

0:41gonna have a call with a banker today and I got super excited so it's great to have you back Eric for number four for Pete I think our first ever quite the honor not just any Banker the consent I said my favorite prescription software Banker my favorite Banker as well so Eric you put out this report every year and the reason you've been on four times is because Jacob and I are continually Blown Away by stuff you share in the report and we're excited to have read your very first one when we were both super bullish on subscription apps and not that many other people were but it

1:15feels like every year you share something that still blows my mind even though I do this day in day out and this year it's the fact that Apple's app store is already by gross revenue bigger than 450 out of the 500 Fortune 500 companies which I should know these things right I look at these numbers every day but golly it's just huge and we don't think about it in those terms yeah I think it's something interesting because a lot of people when they think consumer subscription software they're oh it's a cool initial industry and then you step back and say okay well what is it part

1:51of where's the storefront and so we just did some research and this is all publicly available information right you go to the apple 10ks and 10qs read about there's some really good research out there but so when you start stacking up the revenue it just grows consistently year over year I think they're talking about 95 billion this year wow okay like how do you put such a large number of comparison Tesla which is a phenomenal company will do about 100 billion this year Procter Gamble which every single one of us owns something from them in our bathroom for sure and probably our kitchen they'll probably do 85 billion

2:22gross not talking about profits even yeah top line revenue and profit I think this app store is phenomenally profitable they don't break it up specifically but rumors have 20 to 30 percent profit levels and so you're talking about a 20 to 30 billion dollars in profit and that'll rank them extremely high within the space and so I can't imagine shampoo is doing quite those numbers yeah I mean it's all you shampoo deodorant toothpaste you get a whole bunch of services so then we okay that's huge dollars okay and what's included in there and there's a bunch right just to be clear it's not just consumer subscription there's some

2:54gaming there's movies there's Apple TV Apple music but all those things are purchased through the Apple ecosystem slash phones primarily the key thing we like to talk about is it just shows you know that business was probably doing about 46 billion in 2019 and now it's close to 100 right so that's almost a doubling of content being purchased through the App Store regardless of of what type it is and it just shows that this ecosystem there's argument around consumer fatigue there's argument around like how much more stuff could people truly buy and the answer is a lot we don't see that slowing down and then the

3:25thing we really found fascinating was that if you look at all the other businesses out there that are marketplaces within the App Store I mean you kind of include both Google and apple there's close to 6 million applications these are small businesses or large businesses running within that ecosystem and so that's quite powerful and I think even within our little niche where you guys are playing right and this is why I love Revenue cat which you guys are building is there's close to a billion subscriptions coming through the app store today and many people have multiple and so that number we expect is just going to continue to grow it's

3:53quite big when you start stacking it up compared to other big Industries I was talking to somebody about this this weekend I don't believe there's a natural limit on the depth of software if that sounds a little heady but the potential combinations of software are essentially infinite and I think one of the charts in the report also just shows iPhone penetration like how many iPhones are there which is over doubled in the time since we started Revenue cat in 2017 which you look at the 20 year over year you're like oh that's numbers but not crazy but you compound that out for not that long five years is not that

4:28long and now we've suddenly there's two iPhones for every one that there was five years ago and as that continues to expand you just have this fractal creation of software within those you know a niche that's too small today to support a business just wait five years right it'll be twice as big right and then another five years it'll be four times as big as that so it's hard to comprehend and I think part of why people myself included sometimes don't think about just how big the App Store is and apple services are is that you can flight the 95 billion with gross Billings oh the 95 billion is what all

5:03of Candy Crush plus all the subscription apps is like gross gross but that 95 billion is Apple's 30 plus all the stuff that they sell so that's not gross buildings and in the report you mentioned the number 1.1 trillion which is an estimate of the overall gross buildings of the app store and then Apple has done reports where they talk about overall app ecosystem Revenue where you take into account airbnbs that are booked through the app that's published on the App Store rides through Uber and it's trillions of dollars flowing through this app economy I mean it's like a third of the internet right like the apps are now part of the

5:45internet I don't know if most people like conceive of it that way or if Apple conceives of it that way but they've taken a huge chunk of dinner which is probably why they're under so much scrutinies because it's a step back from the sort of liberal structures of the internet not to jump from economics into technology too much but still fascinating that this far into phones that the web experience is still not really seen as the place to do business on the phone right you would be surprised and I guess to some degree Apple wants it that way right the more they can keep the web experience

6:16substandard to the app experience that's a better way for them to extract licensing revenue from their platform but I don't think it's just Apple I think also just technologically the web has not been able to compete from a user experience perspective with you know we talk about the apps are getting regulated look at websites are just unusable now right like thank you EU cookie pop-ups right like especially on mobile the user experience debt that that adds on mobile is two times as bad as it is on a website it's the internet now we're just talking about the internet I think when we talk about the App Store in a weird way and the way

6:49we've looked at is the UI ux so much better within an application versus within Safari right so even if you're on Airbnb and you go through it through your Google search it keeps you under Safari or Chrome if that's what you're using any page it still recommends to open up the app yeah it's where these companies are investing which is shocking I mean I don't think companies would do that unless they were forced like the technological constraints of that web platform because there's like a lot of advantages to shipping on a web it must be that they can deliver better especially for the ones like Airbnb

7:16where payments can be done they don't get the benefit of in-app purchases the best this is the guy who calls in and purchases a benefit now uh the benefit of internet purchases for their service they have to do direct Commerce with their customers it's I guess not surprising but still surprising when you take a step back it's one of the many things I think Apple doesn't quite get enough credit for is that yeah they could be building out an HTML5 app platform that is the web but they invest a ton in making that app experience really good and they do that not just because the web experience doesn't allow them to

7:54charge the 30 or whatever they do it because it's a native Computing platform where they can just do more with a native Computing platform been a Safari app can do no matter how much they would invest in that I think that you're thinking about it exactly right they love keeping people within the ecosystem I mean you got to give them credit too they're one of the ones who really unlock purchasing through phones they didn't make it so easy I think the ecosystem as a whole would be way way down the fact that you guys completely trust pushing two buttons or pushing one button twice on your phone as a complete

8:24secure way to pay is wild if you go back to like the Singular Wireless days you're trying to pay with uh yeah I mean think about that like I mean we're gonna be the generation that has to manage that Gap future Generations are gonna be like yeah I just kind of hold the phone up and I scan the QR code or double click something and everything's secure it happens instantly I don't have to think about it in two Arenas too they've done it in app purchases but also the way you know for most you know Shopify supports it which is half of Ecom now as well you get that same experience with

8:50Apple pay which I don't know if we can measure and account for that but I don't think it's insignificant they have Apple pay on on Mac OS I don't I don't know they do I don't must not have a setup I'm almost us more willing these days to do Ecom on my phone even on mobile just because I get Apple pay I'm probably twice as likely to convert because it's like I don't have to pull my credit card out and type numbers and all that crap exactly we're talking about this huge sleeping giant so I think that's why we wanted to call it out it's one of the

9:17first pages in our report which is just sometimes people will poo poo like consumer businesses or the application area and we're like this is a huge huge huge Market with lots of dollars so pay attention and it's growing faster than almost anything else out there you hit on just the number of apps do you think the people looking down their noses are sort of overlooking this is because of the fact that there are big winners in the App Store but there isn't Venture scale or like big 10 billion dollar IPOs yet four apps within this do you think that's part of the reason then it gets

9:45overlooked so two answers one I think historically or if you're a 40 year old 50 year old venture capitalist private Equity Firm like the tournament app just seems like a little Fufu thing right like something maybe a calculator app or something to edit photos you don't understand the economics behind it but then if you start saying okay well on your phone Strava billion dollar company Nike run another outdoor business super popular Netflix Spotify most people have them on their phones okay to public companies Harry single well guess what you probably use a dating app public companies billion dollars right so you start going through this we actually

10:17have a thesis that there will be a lot more that go public and that'll just kind of open up people's understanding of the App Store like what's the hottest IPO that's gonna happen in 2023 instacart how many of their purchases come through an app almost all of them now that's not a consumer subscription business by any means but it is a mobile first but it certainly reflects some sort of consumer Trend right completely so our argument is that we actually think of a lot more you kind of talk about like MyFitnessPal which Francisco Partners owns another business is doing millions in profit you could talk about

10:47Onyx which is a hunting business extremely big business it's close to IPO scale there's a bunch of them that are out there and I think you'll see more and more coming out of Education we have a bunch of thesis around Family Planning female Health that eventually there will be more and more success stories and then that'll just get people to recycle their thinking on what it would exist in this economy and then there's a ton of what we call SMB level businesses businesses doing 10 to 20 million in Revenue which is Big they're doing it all digitally and they're very profitable when I think of our user base

11:19which doesn't reflect the greater you know a lot of those like Titans that you talked about of consumer subscription started well before Revenue cat and we sort of missed as a easy customer we'll get you someday but we do see I love I was telling somebody about it recently these tons of sort of and again maybe not Venture scale or maybe not IPO scale not yet and maybe it's not like B2B where you can scale to a billion dollar outcome in a matter of single digit years it might take 15 years in consumers house land but when you look at the underlying macro trends that you're showing it's hard to stand up and

11:50make a straight face argument like it won't happen right I can't tell you the timelines might be a little off expectations but that these won't produce high margin very stable good growth businesses I think there's a lot of evidence that that's going to be the end State yeah one thing I've been thinking a lot about lately is just this increasing willingness to pay and we've talked about this a little bit in past episodes with you Eric is just that over time more and more people are pulling out the old credit card or their face when it comes to in-app purchase and actually paying I think Jacob it was the

12:25last time we talked to Eric that you mentioned your dad not wanting to pay for a subscription a NASCAR app for a NASCAR app I would guess that at this point or at some point in the next year he pays for the NASCAR app yeah there you go yeah okay so after a conversation I had to sit him down and be like Dad you know how I make money I don't even think it takes that like a lot of these people who were like oh apps are free I should never pay for an app they're running into a NASCAR app and like okay I'm gonna pay because this

12:57is super valuable to me and so there's multiple layers of the growth that is happening in this space is it not only have iPhones doubled in the last five years but the number of people who find something valuable enough to pay via subscription is growing and there's an interesting causality thing there is it's like well are people sentiments changing or are the incentives there that are causing companies to find the product Market fit to expand the market which I don't think there's really a way to untangle that right is it natural I got my dad the subscriber my dad that made that you know now we're gonna have

13:29to interrogate free will but yeah like you said both you know when we go back to this fractal concept of the App Store growing and these niches getting created and you'll probably always have our standard you know Fitness and whatever these pillars of categories but I don't see any reason why on some time time scale most of these niches can't create meaningful businesses every Niche is going to produce a unicorn no but enough are going to create enough of these smbs for it to be a space like worth entering for a lot of software creators all this growth and in-app purchases has brought the attention of regulators worldwide

14:05and this is something you call out in the report Eric that there is increasing pressure on Apple and Google to open up payments to reduce fees to relax requirements what's your thinking around that in 2023 this is always the literally billion dollar question that people are asking us and you know I don't think we have any crystal ball here in one or if Apple makes a change you are seeing Google start to make some shifts the I'll call it pressure from both the EU and a few other regulatory both in state and federal here in the US is starting to increase they kind of won the lawsuit against epic but listen a

14:39lot of stuff got disclosed and people are starting to dig into it right now there's a pretty good lawsuit coming out of the UK so I believe there's a second case too with Google and epic as well that isn't resolves yeah yeah so the question is like at some point do they just say hey we're making enough money here let's rash it back like I think every app developer can agree that it's worth something to be able to sell globally on day one is worth something and so the question is is that 15 is it 20 I ultimately think at some point there will be a crack and then that is

15:06just straight cash flow for the app developer ecosystem and apple will find a way to make it back because then those individuals will either lower their prices to get more people to subscribe or they generally increase price over time by adding a lot more features because they're just so much more profitable so now they can continue to invest more and more in their businesses because they're generating that much more cash flow so I guarantee there's an analysis being done at Apple that hey let's figure this out at some point and just kind of try to shift some of these lawsuits off because you just don't want

15:33to be the target of regulators today Facebook had it Microsoft has had it at some point that you know I call it the iso run of the global Regulators will aim at every major tech company and you just want to stay under that Limelight as long as possible so yeah it's a bit of tactics at this point but I almost wonder if even a rate cut is going to be enough it's like once a regulator gets the b in their Bonnet that they want to crack down on this I don't think it becomes because it never really was a question of Economics right I think it's

15:59a question of power and sort of making sure that Apple doesn't become bigger and more powerful than these Fiat governments like the dma right now is happening digital markets act in Europe did you see the ridiculous cyberpunk press release from the European Regulators on this oh my God it's so good it's really good in the show notes but they like tweeted out who their Gatekeepers were and for some reason it's on like a Tron background it's like technology anyway we're living in a very strange timeline but I mean they're already doing it and like apple could cut rates tomorrow it's over it doesn't matter like they're gonna fall under

16:33these regulations but it's not over because if Apple does cut rates to compete they're gonna win back a lot of those payments I think part of what works in your thesis Eric is that if Apple lowers Ray they're going to pull back in payments that aren't currently happening on the App Store like this weekend I was downloading YouTube TV so I could watch a football game and then one of the few quote reader apps that does let you click a link to go outside the App Store and I jumped through all the hurdles and I had to pull out my credit card to get the three-digit

17:06surgeon general's warning against outside App Store yeah I had to jump through all the Hoops but somebody liked YouTube TV if it were 10 or something in that ballpark that Apple's charging less do they want those consumers to be jumping through all these hoops if there are alternate app stores in Europe but developers know that they can make more money on Apple's app store if Apple reduces a fee I hope that's an analysis being done inside Apple too is like how much of these payments will we win back if it is 10 12 whatever those numbers I don't think there's enough McKenzie consultants in the world to get that

17:42answer right like it's just too complicated right there's the price missing pressure in this developer Behavior then there's consumer Behavior then there's conversion rates and throughputs on the App Store stuff I mean it's like trying to change pricing at a SAS company not ask me how I know it's like there's just too many levers it's like impossible to predict at some point you just gotta aim and shoot I don't know I mean it depends on what side of the demand curve they're on right like if they cut rates is that really going to bring people back it's a lot of effort to like set up those

18:10outside systems so I guess in theory it all equiliberalizes in the long game but the thing that's got me a little Melancholy about it all is it's already a mess like we've already created a mess the fact that DNA exists and it will exist forever it's like another one of these cookie things maybe we're gonna get rid of the cookie thing at some point and the internet will be fixed but I just worry that this same regulation without fully understanding the consequences that has led to the web being somewhat unusable these days is going to come to apps and it's impossible to predict the consequences but I don't know we'll just have to wait

18:45and see I see like the cat's out of the bag already that's on Apple right to take initiative to instead of letting seven different jurisdictions create their own laws and then every prep has to jump through it just take the lead make a big splash solve the problem and I think that's my thesis is that they're smart enough they will make that decision I think when the trade-off becomes very apparent if they can solve it it's already complex again seven different jurisdictions right and maybe that was their intent with the first year 15 they were trying to take off some of the heat but it's hard to

19:12evaporate 20 billion dollars or whatever that is like not free money but it's about as good a free money yeah it does as close as you're gonna get right from a regulator standpoint I do find it really interesting that I don't think Apple and Google get enough credit for just how consumer friendly their payments are you can go to one place to unsubscribe they have fraud protection they have all these kind of layers built in and The Regulators better regulating Apple and Google payments directly versus now anybody oh yeah I don't even think about it I mean there's laws in the U.S now that are coming up because you have

19:50people like the New York Times of all people like making you make a phone call to cancel your subscription and so there is from a regulatory standpoint in that consumer loss yeah yeah net when it's all done I mean even if the price cuts and whatever like I mean that's always been my stance again it's hard to give up 20 billion dollars in profit right so maybe Apple overplayed their hand by not giving some to me it feels like the market has constructed itself in such a way that it's oligopolized right there's only a handful of players and there's no real way to break that Monopoly up so now I don't know they're

20:24trying to create some sort of Market pressure but there's really no way like you cannot replicate a free market you know if it's like IE versus Netscape okay at the end of the day it's an icon you click on they're sort of like comparable Alternatives but in-app purchases and not in-app purchases are not the same technology right they're not the same thing but The Regulators are trying to act as if that's going to create like sufficiently real Market pressure again so we've just like half solved anyway complaining about European regulations it's my second favorite activity we can summer it off with it just stay tuned but it's been like two

20:58years of staying tuned and nobody still knows what's going on so but I think we will see like when the dma rolls out we'll get some hint something will happen in 2024 yeah for sure one of the other things you mentioned in the report that I thought was really interesting was you proposed a question who will be the Berkshire Hathaway of app stores so who will be Eric you pose a question but give me the answer and maybe for the finance nerds explain what that means or the non-finance Nerds yeah if everyone who has a social life I'll explain this Berkshire Hathaway is Warren Buffett's company right and he started up just

21:35cash flowing businesses right if you look at his portfolio he's got stuff from like oil and gas pipelines Steve's Candy which is chocolate candy you know he used to own textiles Berkshire Hathaways yeah that was the textile company right or something exactly that was the original name right so that was the founding so basically Buffett his thesis was like he just buys good businesses period right it doesn't matter what industry and so you've seen Roll-Ups happen in other Industries Car Wash Industries you've seen them happen in like doctors clinics where people kind of get economies of scale and bring them together and you're starting to see

22:02that in the Apple store but the interesting thing is we haven't seen it to the extent we would have expect given the amount of dollars out of here and the fragmentation of ownership and if you think about it the ability to streamline back-end Services is quite powerful here once again is a digital product so you know there's companies like Maple media and La pending spoons out of Italy Mosaic which is like an IAC company in New York they're all doing it and getting some pretty good scale lots of profitability but it isn't where we expect it'll be at three to five years right so I'm sure you guys have all seen

22:31some Roll-Ups that have happened like Amazon they raised billions and they did it within about a span of like six months absolutely wild now that sector was probably well oversold and it got really competitive and then I think a lot of those businesses are now starting to Trend backwards they kind of rode the e-commerce phone so it's probably a bad example but it's an example of investors tossing money after a roll of strategy and we haven't seen that in a considered subscription space yet and so we've seen plenty of people do SAS investing we definitely have some rock stars that do CSS investing but I think people are

23:00going to wake up to the dollars that are here and how profitable these businesses can't be so I listed a couple of the names that I think have a really big chance and there's plenty more right there's reflectively out of Europe that's coming Union Apex out of Boston there's a lot of names that are starting to pick up to come after this sector do you think part of that is it on the banking side not being able to price the risk for debt to buy these things are there macro because it's like yeah what's the difference between an app and a car wash well there's quite a few is

23:26that the reason is it a microeconomic thing where sellers don't want to sell or buyers don't want to buy or is it a macroeconomic thing where it's just like the current state of interest rates and compressions and whatnot don't support it I'd probably breaking into a couple categories I think debt is a little more challenging here right their debt has now started to come for SAS like B2B SAS software you're seeing private Equity good pretty decent deadlines to do this I think you'll be able to see that with CSS but you need to have a decent scale three to five million profitability to get a lender to take a look at it we've

23:54definitely seen some lenders that will back transactions that we've done are they getting as favorable leverages as they would in like a SAS business you aren't but you also shouldn't take as much leverage favorable leverage here I would actually change the definition and SAS right getting four to five times ass ebitda isn't I would recommend getting like two to three here at consumer so you have a little more leeway you don't want to get in trouble on the dead side here that sounds like just admitting to the unknowns that CSS is a little bit still an open question well I won't say historical question it just has

24:22different characteristics right B2B SAS you can consistently say you'll have it was really good B2B SAS right 90 gross retention people look for much higher rates and CSS you look at 70 is a really good first year annual retention rate so then mathematically you shouldn't take on that much debt because you don't have that much cash flow guarantee it's a math equation but you're much more exposed to the acquisition environment which tends to be more volatile yeah and I think the idea is apps have been priced all over the board in the last two or three years there's enough data points out there now that I think people

24:52will be able to price it much more accurately and listen my job is to ruin that pricing by selling my clients for the highest price it'll be an average and the average is where people will look at and try to decide if there's purchase to be made and so there's a lot of streamlining you can do on the back office around marketing content creation finance and then you can also start doing bundling so it actually makes sense to partner a few of these apps together and you can't do that unless you truly own it you know there's companies like palta that's doing some really cool stuff in health and fitness

25:17they're bundling about the health and fitness offerings together if you look at match publicly traded company they just bundle dating and they don't care who you are or who you want to date or who you want to fall in love with they've got a product for you so you can cover everything in that space you could kind of say they're also approach our halfway updating in the App Store these days so I do think there'll be a lot more there'll be stuff that happens in Fitness and stuff that happens in health but definitely be stuff that happens in education check is a really good example of that when they bought Mathway they'll

25:43definitely do some more stuff on that front so I say stay tuned to this one we think there'll be some really big outcomes here and there have been a lot of M A in this space any particular ones you wanted to call out of interesting deals that have happened recently the biggest one that I would point to has been experience just a really big deal with some Italian Banks they bought out about 600 million of debt so back to our debt question Jacob that's a big check and then we went out and bought Evernote which is a really famous US app it was a good business had kind of made me been

26:11left by the wayside but rumor has it they bought that won't disclose anything but well north of 100 million dollars it's a big business to buy so I think that's one I think there'll be a few more that start coming out if you look at what Francisco Partners just did with the Weather Channel people don't understand that but there's a paid subscription feature in The Weather Channel That's wildly profitable and Francisco Partners did the same thing with MyFitnessPal which is once again wildly profitable and it's a free app so I think you just need more people to start to think through that right and understand the economics and then the

26:41cash flows and I think you'll see some more and more big outcomes here you said a lot of people don't understand it I don't understand it so IBM bought the Weather Channel it was like a subsidiary of IBM and then that just got spun out of IBM to a private Equity like why and do you know any more about why and how all that happened their goal right if they used to take the Weather Channel and take it from being you know Legacy brand that was on TV 24 7 and a lot of households move it off cable and turn it into you know if you look at Apple

27:09weather it's okay I don't think anyone's Blown Away by it a lot of people using a third-party weather app but it is something that you look at every single day and so there's a lot of ways to monetize an app or service that you use every day it's a good example of like dipping their toe kind of starting to understand this and maybe they're like okay now we can see some replicability here I'm gonna be interesting to know what their exit strategies are for those right because I don't think they're going to hold them indefinitely I don't know there's buyers for everything I guess the question would be do they

27:35think of it as an IPO or do they think of it as flipped to one of these holding companies potentially right or they don't exist yet do their own roll-up and IPO a bundle between Weather Channel MyFitnessPal a couple other big businesses spins out us its own IPO should be like another ISE yeah I think all the above is on their board well one of the things I think the Weather Channel Evernote and others all have in common too is this push into B2B from B to C apps Weather Channel and maybe this is part of what Francisco Partners is headed toward is that the B2B weather

28:09data space is huge and there's so many examples notion going from more B to B to more B to C there's like just this real blending of the use cases between B2B and B to C these days and you highlight that in this report what are some of the interesting things you're seeing in that blending of B2B and b2c so coming out from the b2c side right a lot of businesses ramped up during Covenant on b2c people were needing new solutions to new problems they never had before Peloton is a great example headspace calm all it did very well because people were stressed they didn't go to church right there looking for

28:43something different they didn't go see their therapist so those companies took off now I think some of the errors come out of their sales and so people are looking for new avenues of growth and B2B is a huge untapped market and if you sit back and say okay does everything a consumer Need Is that real readily applicable for business answers no of course not but there are definitely a few that make a ton of sense for businesses to offer their employees as either benefits or ways to make them more productive or to make their Workforce more efficient so slack right if you think about it that way it

29:13started as b2c they're just selling to small individuals they could create teams and then they start selling to p2bs and Enterprises Dropbox exact same solution right they started offering like file sharing to one person and then organizations were like hey I could just use this to replace what I'm using on a server let me just go with that and so the thesis we've had and we've seen this played out with companies like fin on headspace and then merger Ginger is that if you're designing a product that consumers love not just love because they have to use it like your healthcare app but love it because like hey I will

29:42pay money for it it's that good it's that efficient it makes my life that much better there's probably a strong rationale that businesses will want to use this and so you've seen this happen in like an education right like lynda.com they sold a LinkedIn and they're selling courses to individuals and now they take LinkedIn Salesforce with selling recruiting services and they sell them in courses to businesses help your employees get better help your employees get smarter right it's the same use case you're just using a different sales force so what we think is the magic that Builders have around designing It Best in Class service for

30:14consumers something once in the individual you make takeable pay for you can sell that to B2B pretty easily if there's a strong benefit you can show to either Workforce or their productivity and so it's a really nice growth Avenue for a lot of companies if it makes the right fit so we're seeing a lot of companies do that I wouldn't call it a pivot I would call it a growth extension yeah it's a new channel which follows the trends of consumerification of SAS in the workplace as well right bring your own device all those buzzwords of five years ago or six years ago I always like to shout out photo room one of our

30:43customers and friend of mine's app because I would call them B2B in a lot of ways because they sell to like Shopify sellers it's purchased on the App Store but you know I think so much about their success has been the stickiness of selling to somebody who's using their app for a business use case even if it's in this sort of prosumer Independent Business Runner persona but then you've also seen them pivot to opening up their tooling and selling an API now right which they are selling in a fully B2B motion which is I guess talking about going that route of understanding who else you can sell this

31:12technology it's all useful technology right it's just bundling in channels Evan canvas another really a good example right we started off making software for yearbooks right for schools yeah right about as smbs you can get it selling into the Australian school market and then individuals use it bands use it wedding planners use it so all of a sudden that growler spans and then all of a sudden it's competing Head To Toe with Adobe that's really fascinating to me that you managed to move that quickly but it's because the app is so well designed for a consumer that it just takes off and a B2B use case is

31:40relatively apparent yeah it's easy to sell when people want your software and I wonder if some of this B2B b2c play won't even fully cannibalize each other like I was actually just thinking the other day I use YouTube for work now Jacob my boss's boss Jacob we can have the conversation Here YouTube premium well I don't so I was actually just thinking the other day we should get it on the revenue account I open it sometimes and I get real annoyed so right exactly open my personal YouTube account which I have premium all right it's officially approved we can get premium for the company YouTube account

32:14but this is a perfect example and it's not cannibalization because I'm not going to log into my Revenue cat email on my TV to get YouTube ad free or whatever but it's really annoying and I'm not going to log into my personal Gmail online browser window that's my personal stuff on my work computer which you're not supposed to do until oit we don't have an I.T department but yeah it's interesting though it's like massively underpriced if you think about that so we'll pay 9.99 a month for our whole company to have YouTube premium and like when really the value we derive out of consuming content from YouTube but then

32:52also creating content on YouTube and all that stuff is much much higher than that that's always the hard part it's like sometimes you're selling something to do with consumer and to a business and like even on a per seat basis you need to charge 10x in the business context for exactly the same thing that's hard like we experience it at Revenue cat like some of our long tail looks very much like consumers they're like small Indies and then we're also trying to sell the same product for like a much higher price point I think the other end of the market and it does take a little bit of

33:19value capture arguments and sort of making sure we tell the story in the right way so it's not easy on the pricing side at least yeah totally agree but I think you'll see it happen more and more another thing you mentioned is the three C's content Commerce and community and this is one of the big focuses of the report this year tell me about that yeah so it's a thesis we've been kicking around we call it the three C's but it's as you exactly called out it's content Commerce community and so the way we've thought about this is any category right regardless of what type of Industry you're in if you're a

33:51consumer brand the hardest things you have is acquiring new customers getting them to do a purchase and then keeping them up like their LTV that applies to everything from like selling Coke or Pepsi to selling a consumer subscription app and so if you looked at like a lot of the d2c brands that have taken off in Luggage in female health and nutrition in almost any category right their biggest challenge is finding users and so what we've seen happen and we've done this in a few deals I won't name which ones but if you create really high quality content right that's SEO searchable or eventually will be AI

34:21searchable the consumer will find you but you have to produce that Best in Class content that provides a solution to whatever question they're typing into that browser which is like how do I lose weight how do I need a friend how do I find someone to date right all these questions that consumers ask every day if you provide top level answers to that consumers will find you one way shape or form so that's the content and then you have to convince them to do a purchase and then that purchase can take a variety of features and that could be any conference purchase or maybe try order of vitamins or maybe you do a

34:49trial right which is hey I'm subscribing to an app but I'm not really in there yet I just want to test it but it's getting someone to finally trust you with a purchase and then ultimately sometimes those are one-time purchases and you don't fall in love with the product but like the most passionate ones will want something more with you want to engage with you that want to feel part of the brand and that's the community and what we've seen is people that monetize those communities with subscriptions and then the whole thing is kind of wrapped up by user generated content and that flows right up into the

35:15top of the funnel which is you know acquiring the users and so we've seen companies start to do this like mediator which is a TCG portfolio company you'll see a lot of others where the passion that people have for certain brands goes them Beyond like just a purchase history right they wear t-shirts of the company and you think about that and that's just a weird way to be a walking billboard for certain companies but I see tons of people with Discord t-shirts and it's just part of their Persona they like to be part of that they like to be part of that group and so what we've seen is

35:43we're helping a couple of companies now like you should have all three of those stacks and if you don't you might want to look at buying one of them right and then you can really expand the LTB of your user or you can make it much easier to acquire a customer for free right so your marketing budgets go way way down that's an area we're spending a lot of time focusing on that's our thesis that's fascinating and with all these things like that's not going to work for every business different businesses are going to have to find different ways to solve that top of funnel we actually

36:11talked about this on the most recent podcast with Reed deramus he was at Crunchyroll and at Crunchyroll they had that t-shirt task so it's funny you brought up the t-shirt is that you're going to have apps that people aren't going to wear your T-shirt and that's okay but the magic of those three together is part of what's going to build these massive massive companies and I think you're right that Community piece I think is overlooked in kind of the app space it's like are you just another app or are you something people really deeply care about and then how do you position yourself more in that

36:44direction it maps to like the three challenges I think of when we're thinking about like product strategy for Revenue cat and stuff like that that all apps have it's acquisition conversion and retention right so it's like content for acquisition Commerce and conversion same thing and then and Community is a huge lever for retention right like continual creation of content or like user generated content and Affinity content can be a very broad definition right like something has to entice somebody to try your app out right even just your your app store Pages content right like that's a form of Storytelling and discovery that you need to nail it's

37:17probably not sufficient to lead to some of the like margins that you've been talking about Eric today you need to have like a lower cost channel of acquisition than that there's no consumer subscription business that doesn't have to solve acquisition conversion and retention like that's it those are the three problems in a Perfect Analogy rate so I just had a daughter well I didn't have one my wife had one I was around for that I now have a daughter I was kind of digging to this space and we talked about this report like we think of big unicorns and female health and a perfect example if you

37:47think about just the I know you guys have kids but for similar listeners that don't right if you're thinking about getting pregnant there's a ton of apps and solutions you have for women that can think about it right and they'll find those and there's free and there's paid but that is like the start of that journey and that Journey ends hopefully with pregnancy right and there's a bunch of stuff you could buy once you're either pregnant or just had the baby everything from Medical Services to vitamins to cameras to different tools for measurement tons of stuff like it's literally an unlimited e-commerce offering I noticed my spend went up when

38:18I entered that phase in my life a little bit Yeah unexplained hits over the last 13 months and I've got four so multiply all those by four I think you can play as much as David all right David you're not all prefer as cool as you I'm just at one give me a break but anyway and then you have the the baby right and then there's tons of baby toys you can buy I want each one of those value chains right if you're in the female Health space you can acquire the customers with content and a nice service but then you lose them once they have the baby there's a

38:45natural sharing point and then if you're selling baby Goods you're competing with everyone on Amazon on Google for key Search terms like baby blanket for baby monitor for baby clothes right that is a crazy competitor category and then ultimately you lose that customer at some point and so like if you put those three categories together like pre-pregnancy pregnancy pregnancy and baby that LTV that consumer goes from one purchase to effectively like three years that's a huge shift in LTV and if you can acquire those customers at the very beginning at that point and then monetize them across that entire next 36 months it changes the entire CAC of

39:20those businesses so it's a big thesis for people how and we're actively having conversations about it so there is a solution there and the question I ask myself on female Health but like who's the apple of female health I was the brand you go to that is by far the best and you don't question it you just buy it and there isn't one there should be one right for something that happens millions of times a year why isn't there an Apple female Health yeah well and fintech is one of the six opportunities you highlight in the report as quote category Killers is categories where you see the potential to build massive

39:53businesses to become the apple of fintech to become the apple of act so talk me through the other category killer potentials so category killer our thesis is in consumer subscription right it generally ends up being like a duopoly of two to four major players in each category and then a bunch of smaller businesses that are still good but won't hit like unicorn billion dollar exits right you see this in dating you see this in Fitness you see this in entertainment right both at video and music there's only a few winners Duolingo and Babel great yeah perfect example on education they're checking there with busu which is a

40:27cheap people have deal hashtag advertising so then we kind of looked at what are the categories that don't have those natural winners right where are the names that you don't see the automatic answer for when you're looking to do something and so like femtech was one we think Family Management is a huge category everyone uses outlook for their personal life but like what's the product for the chief household officer who's in charge of scheduling activities people are trying to act together like calendly and merging a couple calendars and then doing some budgeting tools I've seen some d2c Hardware stuff for this but but I'm also I see that stuff and

40:59I'm like that's not the problem it's putting on the wall is not the problem this is a data merger issue right I go through this constantly my wife's been out of town a lot and our shared calendars are a disaster and she actually bought a physical calendar like oh I'm gonna do it it's easy this year and then she has to be out of town and like now I have to run all the playbooks and it's not on my calendar we're on the physical calendar that we just got a piece of paper that we put on the fridge and we write dates down on it which

41:27again when you travel is bad I got embarrassed where I was like I had to call the doctor for my daughter I have no idea who my daughter's doctor was not a clue like I couldn't find it right my wife knew her on a first name basis we knew each other well I had no idea right that should easily be able for me to find up there and all that information could easily be sync we have it all it sits somewhere within this yeah I mean we've solved this problem in in the Enterprise if you will right and there are players already in this space like

41:50what do you think it's going to take for one of these to break out man I've looked at them and it's like I've tried and it's hard to use or or whatever like what's it going to take I think it's going to be the API intersection right you got to have someone come in with a bunch of money and start spending money on paying people to get their data API is connecting from like mint.com you got to be able to access calendar dates school dates but a lot of that you can start to solve that with AI right if you're able to read emails and you say

42:16all right any email I'll get from St Andrews preschool that immediately goes into our family calendar as an activity if you start saying hey my personal AI that sits on my phone read the text messages that come in and mention Jimmy's soccer practice pull that in so I think not to spin off in an AI but it's just data and it's structuring that data into an output or a dashboard I don't think it's that challenging at the end of the day it makes me think of flighty our friend Ryan Jones and his app which is not an app that hadn't been tackled before but like sometimes these

42:45categories I feel like they just need a bit of an otor approach right like somebody who's going to come in and really build you know I think about this calendar app I use on desktop called KRON that got bought by notion I think in these basic apps there's still opportunities for really Discerning and caring user experience people to come in and that's my feeling with David like you didn't use it because the product Market if it wasn't there the user experience wasn't there like if they had designed the user experience right and designing the user experience right for product Market fit means making that onboarding so sticky that you wouldn't

43:16have got frustrated and confused and like it would have just been easy to use right it requires a lot of setup it may even have to have required like a service angle right to onboard yeah you can buy some Mackenzie Consultants to come in and set up a hired Accenture to do my family calendar sleeper to win the Family Management I recently ramped up with green light and it was a huge onboarding and everything else but now my kids all have credit cards we can give them allowance right to their credit card it's actually a phenomenal service and back to some of the topics in the report we originally

43:48used green light like five years ago and it just wasn't there yet it was a lot of hassles my kids were young and then recently is sitting at the pool with said fellow dad the dad was like oh yeah my kids are doing all these chores I'm like what are you how are you doing that oh yeah we got this green light card and we put bounties you know on the chores and then they go do them and they get paid and it's this great one layer of Family Management then I went and signed back up like five years later I've been reacquired it takes that long it takes

44:18that long to build really great software right five years to make a really great app there are plenty of examples out there of apps that really it just takes a long time to like iterate and back to investment Eric the amount of money you need to like front load that kind of development time maybe isn't always that easy but honestly you can get an app to profitability I mean slopes may be a good example of an app that has been around for a long time and certainly wasn't as functional and featureful when it started to where it is today it's a Powerhouse today it wasn't like that on

44:47versions one and two I mean you need the ability to structure the data and then it's going to be some sort of a modular thing where like you pull in the school functionality right you maybe pay a little bit more to upgrade to that and then you pull in the college planning or the financial tour the chores tool maybe pull in the grocery purchase right every kid can select something for the grocery sure that's a huge Cairo right I think in the word of mouth of that category will be massive we think Sports is another big one and this kind of ties into Family Management but it's very

45:12separate which is like David if you ask yourself how much do you spend on Youth Sports a year between like fees registration driving uniforms gear I'm guessing it's starting to approach like five figures I don't know David's kids just do open AI that's what his big bills are I mean put Roblox into that right whatever my calls yeah my daughter's playing volleyball in the house I feel you it's not five figures yet but we're trying to get my two youngest into soccer so we're headed that direction and you're right I mean driving them all around for games and then I was actually just talking to a

45:42colleague about the apps in this space and just how challenging they are to use and their full screen ads and like it's just not a great space right now but huge opportunity like you said there's ton of spending a ton of coordination there's a lot going on in that opportunity right where there's an opportunity somebody will create the Uber app that will Christine or something like that called 12.00 month easy math right and it just streamlines everything look at class dojo they did for in the classroom right it wasn't through like some funny sales Channel Through schools they went around it with the b2c motion you can probably

46:14replicate that in a lot of these categories yeah so I think that's another one and then the last one I'll mention is private wealth and Tax Advisor right and I think a lot of this not to hardware and open AI or AI tools but a lot of this data is out there your tax code is very publicly written every day it's just impossible to read and it's impossible to customize it to you how does this apply to me in my situation and so like if you look at like what intuit's doing and there's a bunch of other products that are coming up to kind of solve like what's the

46:40level between like wealthfront and like Morgan Stan the Goldman Sachs people with like 50 that's called 100 000 in assets to a million right that's a huge chunk of America and they all deserve something that's customized and probably Tech enabled and makes their life super simple and removes a lot of their complaints and the concerns and the friction and just provides you suggestions on what you should do to manage your money it's sitting in your checking account you should move over to the savings account takes nothing and it gives you five percent first that is a really valuable tool that I think what people are going to build for and you

47:08mentioned Ai and into its play into using more of AI to enhance their tools it creates an interesting shift in how these tools can be monetized because Apple's been pretty clear that if it's software driven and high margin like an AI helper would be that's got to go through IAP and I don't think Apple's gonna seed that ground because I think that's going to be a huge you know if you think of the marginal growth in the App Store in the next five years it's going to come from these AI tools your previous wealth manager app might have circumvented App Store policies or App Store payments because it could have

47:37gone through you're paying an actual human being now if it's AI sorry Apple's going to get their Vig on that for sure yeah but you could probably easily do it as a subscription right and then they just make suggestions and then you log into your app and make the changes or there's ways to make connections so it actually doesn't flow through the app right right right right right right right couldn't log into my Chase account do something for me right move it around some of these fintechs get around that that's one way to get around IAP though is like to have account management which I honestly think at some point Apple's

48:04gonna look at because there's some of these companies providing purely software services but because they have an attached bank account they're just Drafting and it's like that's not gonna last forever Apple's gonna start cracking down good question it's got to get their money yeah well hey I wanted to wrap up on a really fascinating stat and that's the fact that nearly 80 percent of companies featured in the annual CSS report that you've done have either raised or sold and had a great exit any special picks this year that you're highlighting I've got a lot of picks I mean the status and this is a little bit of a humble brag but every

48:38year in our report starting in 2019 we profile three Builders right three companies that are building stuff that are doing some cool things I think we've been really good at picking so we profiled all Trails which raised a big round from Primera blinkist which sold to go one Prodigy Math you know I think we profiled Revenue cat back in the day I don't know if you guys remember that play on got sold to KTR and a huge deal close to 800 million there's a bunch of success stories there this year I think every one of our picks is great right we've got open snow which is doing

49:07something in the weather space we have spot gamma which is in the financial newsletter space with a huge sleeping genome I think that's a big space talking parents who I think David was on your podcast this is a family management business right for divorced parents who have a very specific yeah it's like a certain niche of that category right 50 of marriage is then in divorce which is awful but even if you go to 10 it's a huge huge damn lemonade out of lemons over here tell you I hope it goes to zero but all those are real strong winners I love open snow by the way I'm glad you

49:39mentioned I've been on and off when I lived in California as a subscriber it was like the best snow prediction every year like they hire three people to produce content you're like that's a totally like meteorologists on staff like talking and stuff I've always thought they were like using the fraction of your epics keep pass right you save money everything yeah yeah yeah all right Eric well it was so fun chatting we're gonna share a link to the report which will be out before this podcast airs so you'll be able to go right to the show notes and download the report anything else you want to share

50:08Eric as we're wrapping up we love getting inbounds from your guest David so if anyone has anything to ask like reach out eric.crowley gpeoplehound.com or active on LinkedIn and Twitter and then our report's free so jump on the website when it's published download it tell us where we get wrong right I don't care if I got something right you know tell me what I got wrong come out challenge our assumptions so we'd love to hear from everyone yeah you guys help people sell app businesses right like that's the short of it right if you've got an app Business and you're interested in knowing longer owning that

50:34app business for in exchange for a pile of money maybe talk to Eric we brought into subscription businesses right we that's that's our specialty if you're selling to Consumers and you're selling a subscription we think we are one of One Bank you should call if anybody who's a Founder who goes to try to get a loan for a mortgage don't talk to a bank that doesn't understand your situation because it ends poorly we speak your language we'll be able to log into your Revenue cat dashboard and tell you everything that's going on and just so our listeners are aware you've told me I think the figure is somewhere around

51:01like a 10 million dollar exit is where it starts to make sense to engage G people Hound so we're not talking so you're out for 100 000 and call Eric you gotta have a fairly the transactions get that big you want Partners like you don't want to do this yourself because if little mistakes start to be six figure differences right so we are not cheap and I'm very proud of that paper quality but I think and we'll be transparent with everyone like hey don't use a banker or use a banker but not us we're always happy to give free guidance too it's part of what we give back to

51:29the ecosystem awesome thanks so much Eric it's great chatting with you today it's always a pleasure to be on I really appreciate it [Music] 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 community foreign [Music]