Sub Club Podcast: Tinder: From Free App to $1B in Revenue - Phil Schwarz, Corazon Capital

0:00[Music] [Applause] hey you're listening to the sub club podcast a show dedicated to the best practices for building and growing subscription app businesses we'll share insider secrets from the top subscription apps on the app stores let's get into the show hello i'm your host david barnard and with me today revenue cat ceo jacob hiding our guest today is phil schwartz partner at corestone capital a leading chicago-based venture firm investing in early-stage tech companies prior to joining corozone phil served as 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 talked with phil about

0:45the 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 hey guys thank you for having me so i'm super excited to talk about your role as an investor in seed stage companies at cortisone capital but i think our audience would be pretty frustrated with me if i didn't ask you a few questions on tinder before we get to that because you were at tinder in such a pivotal time and in such a pivotal role at tinder so i just wanted to kick things off and even before you joined you have a lot of

1:24insight into kind of the creation of tinder as a product so i'd love to hear kind of your perspective on the creation of the product and then kind of at what point you joined into that story uh i'm happy to go through it all and i think i i may still be catching up on sleep from those years so so you'll bear with me right um i for context by the way i mean you know i lived in chicago at the time tinder obviously based in los angeles and so i flew back and forth every week for for years uh which is you know fun which is what

1:53it is yeah uh no one likes that but american airlines in any event so tinder i think if we step back a little bit and think about the landscape of online dating just for people that haven't haven't studied it a ton there's really sort of like three eras of online dating the original era is match group a pay to communicate platform meaning you you had to pay something to to do really do anything on it that is a 24 25 year old internet consumer internet business at this point which is you know rare error like there's not many of those that exist craigslist and them effectively right effectively so

2:27um you know match but what matched clearly one of the early plays and there were there were some others along the way harmony being one of those but you know match became sort of the the biggest many years later my now partner at corezone capital sam yeagen and a series of other folks created okcupid and okcupid was a free to communicate platform so that was you know that was uh many years after match was created in sort of like the web one 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

3:00how in the world you can communicate against especially for dating and really for anything i mean at that point it was it was early days i mean you're talking you know mid 2000's so uh so they create okcupid and build it and becomes um certainly the the biggest breakout outside of of matching okcupid eventually gets acquired by match um sam becomes ceo of match group years later tinder is sort of the the beginning of the wave of the third era which really is consumer mobile um and a continuation i think of what okcupid created which is just this continuation of the freemium platform so you know you had match pay to

3:39communicate you had okcupid web one uh 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 what 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 was sort of an older demographic 35 plus okcupid brought that down a little bit you know more in the like the 30 plus you know world but tinder you know really went after the 18 to 24 demo and and 24 to 30 but 18 and 24

4:14especially in a way that nobody else really had and so in order to do that you had to kind of invent a couple things and what tinder what the what the early folks at tinder did and i think it was a beautifully conceived tinder for by the way for all its flaws and there are plenty yeah the the secret of tinder is that it actually does work like it's it's 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 want to make that

4:45clear 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 sort of the paradigm that 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 actually in many respects represents i don't know i think maybe hotter not invented that actually i mean i guess it wasn't swiping but right

5:16there was no swiping but hotter than it like yeah it was there no that's exactly right and i think you know what that did was sort of reflect the way the human brain again rightly or wrongly quickly makes a determination about this person it seems interesting to me or not that could be you know everybody has different criteria for what does that but it but it happened subconsciously and i think one of the reasons cinder worked as well as did is because the product the early product represented the way the human brain functions yeah the other thing that tinder did was create a blind double opt-in system which of course now is the

5:46standard where i can swipe right on someone somebody can swipe right on me and only then does it create a match and um so those were like two sort of native tinder innovations and obviously it made it very graphic and mobile and and the other thing that it did was allow you to start basically create a profile and start swiping in like 90 seconds which was very different very very different than match 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

6:201824 demo in many respects and so i think 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 for in that sense yeah and importantly such a differentiated product to your point it's like 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 um but then you had to figure out how to how to monetize it so so you were

6:53actually there for a lot of these conversations around monetization right and that's something i'm really curious about because i mean famously one of the biggest subscription apps and early subscription app success um 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 that um was growing hockey stick i mean it's just such an amazing place to be and now you're gonna like charge people you know there must have been some some pretty crazy internal debates about how to actually monetize it yeah it's it's a great question and just to set the scene

7:27by the way so you think back to 2014 the the product is starting to you know the product's starting to work for sure um it's still early days at the company i think when i joined we had under 20 people so wow 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 uh so i'm going to just not quote mau but it was i mean yeah we had we quickly got to a like um user liquidity at least in certain

8:00geographies yeah 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 you know match group is the is the dominant company it also owns okcupid at this time so that sort of the two incumbents exist within the same company as the quote-unquote disrupter and it and because hinder was free so you had all this mind share and all these users going to tinder the free product and then you had the cash generators of

8:34the of the parent company wondering what what is happening and how do we bridge this gap and so you had an internal dynamic around monetizing tinder that that put pressure i think on on the early tinder folks that i think rightfully we resisted for the right amount of time so so like that's the first piece the first piece is i think we let the company become a company and and 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 match group and allowing that to happen then we got to a point where okay

9:08you know we've got liquidity we've got product market fit let's figure out how to monetize this the the fortunate part is like online dating is one of those businesses where you know if you get to to scale you can monetize like we had the we we understood the precedent for match 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 and this you know again this back in 2014 when as consumers way less subscriptionized than we are today yeah so we knew that that was a possibility we wanted to wait

9:40until the right time and it's it's 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 had to change to to be not like hesitant to monetize because we you know i think out of the gate when you have a free product and then like you now today and again today is different and so founders that i think have come along in the last three five years may not actually understand this mentality but at that time

10:11we 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 how many months at this point you know for free what would their reaction be and it wasn't like everything was out of the gate monetized sort of more the way it is today and so we had to like coach the internal team around a mindset of monetization and that is um looking backwards almost funny but but at the time was a very serious thing you know and we had a lot

10:43of conversation around whether we do we make this a subscription business or not that was a lot of the topic of conversation obviously match okay cupid both subscription okay keep it more you know freemium subscription and add-ons and there was a lot of conversation about whether this demo this 18 to 24 demo would sign up for a subscription for an online dating product because it was one thing to believe that they would ever get on the non-line dating product and that we had done and 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

11:11everybody's got subscriptions uh you know falling out of their ears and then it wasn't so obvious and so we had a lot of debate about that and um there were two camps there was a camp that said we should create a la carte revenue products because that is the way that people are used to paying and it better matches their expectation and 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 went out as you noted i mean it has become a you know billion dollar plus revenue business over the course of many years so it

11:46it created a foundation for us to build on top that i think had we not done it that way would have made our lives much more difficult you know and as you know 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 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 we

12:17launched most of it in 2015. not in every geography not in like its fullest form but tinder plus itself was a 2015 release yeah 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 um but it was you know you're talking 2015 so seven ish years ago which is hard 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

12:49dating software that gets adopted by an like an older user base first and then you're pushing the adoption curve younger that's a very good i can't think of too many products that have to force that way so that's an interesting constraint very true um and you wouldn't think about it that way unless you were iac and you added a portfolio of like hitting those right exactly but then the the the timing is really interesting because that was around the time apple was like okay like we're gonna open up subscriptions right and this concept of getting that 18 to 24 set subscribing you know you might have just hit it at the right

13:24time that apple was like hey here's an easy way that these folks 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 um and so like right time right like there wasn't another moment in history where like that would have all lined up possibly listen i think that's 100 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 meaningful i mean obviously the iphone is

13:53um a 2007 product so it had been around but it was we were still on very much in the upswing and in adoption and you had the introduction of of very seamless payment you know um software so it unquestionably is is uh connected i think do you remember back then um what some of the early paywall features were and kind of i mean to me this is like the the the perennial conversation any subscription app needs to be thinking about and continue thinking about what goes behind the paywall what's in front of the paywall or i mean you know for some it's it's a hard pay wall where there's nothing you

14:32have to start a free trial but most subscription apps now 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 kind of how the team worked through that challenge of figuring out the premium strategy such a great question and something we talked actively about for framing 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

15:04framing element when we looked at the behavior on tinder 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 um and 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 right and that you know

15:40should surprise no one but but you know it's something that we didn't necessarily build for out of the gate so 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 so 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 sort of you know unintended behavior so what we did is we installed um a limit on the number of times you could

16:09swipe right in a day that ended up becoming sort of 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 what you charge for is things that break the rules of the game that if everybody were doing them it

16:41would 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 more honest balance in the ecosystem and that is how we generally thought at least 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 and 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 less effective

17:11ecosystem for everyone but when you install a paywall it makes people think twice about it and the people that are really high intent that really want to do this they pay and that is that's like a good paradigm for how to think about it so you know one of the early uh product elements that went into kind of tinder plus was the ability to break through that limit on the in the course of a day anyway so that worked uh 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 as i

17:46think everybody knows at this point is based on a radius of where you are that you know your your search radius is limited to kind of some um 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 remember the ultimate goal of tinder is actually for you to get off the product and meet somebody in real life so it has 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

18:17aim 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 want to 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 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 percentage of

18:45people doing it it allowed us to generate revenue and flesh out where uh people had real intent so those are a couple examples of how we thought about it and i think the paradigm of how we thought about what to place behind the pay wall and what to place in front of it it's really interesting and when you have a system like tinder which you described as a game i couldn't think it's quite literally right like so i'm like i'm sure there's a way to represent it as game theory and there's no question it's just it just matters a lot to people so i'm very conscious of

19:12not minimizing like it's all a game you know right exactly exactly uh it's very different from a lot of the more personal more isolated mobile subscription apps that are generally content based right it's a different it's a whole nother dimension of thinking right and actually maybe in some way simplifies right because you can kind of decide like what are behaviors we need to like discourage or put behind a paywall and like you're continuing controlling an ecosystem in some ways or managing an ecosystem versus uh you know some content-based meditation app or something of that along those lines uh where it's it's a different game so if you have something

19:45like that that actually may be in some ways more complicated but does like uh 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 it's what the government does right like no question i mean 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 this 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

20:16understanding 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 um the founder sue i guess used 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 um but they are a stem subscription they're they're an uh they're a stem subscription uh or education platform that that monetizes through subscription and they have done a brilliant job to use the word one more time

20:54of understanding not just how to place things inside and outside of a paywall 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 verse quarterly versus monthly which is a science unto itself um you know so there are and that's 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 frequency with which people are going to engage with that product why they're going to come back to you and how they

21:28would prefer to pay you for that you know it's 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 experimentation 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 much more limited thankfully yeah yeah that's very true for better or worse i suppose in all

22:00that thinking about your customer 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 at all this so 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

22:41stepping into tinder when it was like just hitting its inflection point was we 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 uh 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

23:19the 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 drum beat 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 i think they invented that actually didn't they like i don't know of anybody who did it before them no no i think that's right and they wrote a very data-driven blog that the pres and oftentimes the results would be

23:50controversial and they said we're just going to 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 okcupid is is you know you know they okay cupid did a blog on whether its own users were racist based on the data as an example like very controversial i think that's when i remember being exposed to it right exactly very controversial so we so we we sort of knew that 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

24:17for 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 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 you know when it came to like connecting monetization to marketing when we introduced superlike as an example which is a uh a paid feature

24:48that allows you again it's 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 would 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 wanted 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 liquidity product but

25:17the 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 uh 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 don'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 did not have a good

25:54organization 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 so basically told you when you got a match that was like it and so we had to do like you know we'd 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 a once

26:21a 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 introduced super like as a as an a card feature on top of our subscription eventually that allowed you to buy more super likes um 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

26:52equation wow yeah tinder's monetization has always been so fascinating to me and 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 uh the profile boost is kind of breaking the rules you get more attention than you otherwise would that's a paid feature um and i haven't looked at the at the paywall recently but but yeah framing in that context 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

27:28because y'all were operating in 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 the 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 you a quick funny story about the lack of tools that we had and the result the result of that we sort of invented a

27:58product at some point which was called swipe surge which you know because we observed we fought 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 you're engaging more you know et cetera so it

28:32makes 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 odds just by def 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 sort of marketing product sort of hybrid uh approach so i i and another guy who's uh named jeff morris who now

29:01has a venture fund and what has gone on spent a lot of time on revenue product attender and did on one and has gone on to do many great things and run runs his own venture fund jeff morris and i uh 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 initiate a test 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

29:34crashed 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 uh we got a lecture from the ops team that day um but anyway i think had we had more robust tools these things would have been easier but but uh i mean i guess a successful experiment i mean you can still do that with a robust tool i've seen it so there's no question but yeah 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 ddosed yourself that's very

30:04that's fair enough or you're not running a successful consumer product if you haven't ddosed yourself if your ops team is not yelling at you every so often you're probably not pushing it pushing hard enough so um anyway when i look at our when i look at companies today we look at it we have a bunch of subscription companies on our portfolio when i look at you know i i talk to new ones all the time look i think um 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

30:32founders that like this is just not a subscription but like subscription 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 yeah the revenue rolls in it's recurring it's predictable it's all the things so there was like this over correction 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 uh 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

31:03of the stuff got crazy for a while some of the stuff got totally crazy exactly and we have we have been lucky and 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 lighter traditional litter it shipped very cost effectively and the founder daniel

31:31rotman 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 predictable consumption right exactly predictable consumption the next the one bag shows up you throw out the old thing and you're off i'm thinking of physical good subscriptions i have that i've kept is like my lunches and uh coffee because exactly that i eat five lunches a week and i drink coffee seven times a week that's exactly right no that's what i'm saying so when that when the consumption is not variable subscription works

32:02extremely well when the consumption is variable or unpredictable it works horribly bad and um and you see this by the way in the data with like 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 back and then what do you do you go into your fridge you take out this big stock stack of food that you have to now throw away there's a special sound that rings in your ears when you hear a dump in your trash can just sadness that's well said yeah

32:28exactly um so anyway i think we went through that period 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 a 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 corazon capital so we do you know we'll do there's

32:58nothing too early for us we'll do pre-c we'll do c we just want to 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 like reconciliation is coming and so you know profit is effectively the new growth so so for a while companies wanted to grow so fast that they didn't want to 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

33:24think about delivering value in a subscription 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 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 and economics are totally disconnected from this pure

33:56modernization of the product meaning we see pitch checks 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 one percent take rate a ten percent take rate so your lifetime value is actually one or ten percent of the number you're showing me and so i always encourage startups to 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 pitchers that

34:31have 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 because your funding acquisition you're putting out a dollar into the facebook and google machine and you don't get the 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

35:01knew they had a freemium product and they knew they were 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 write 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 i think they've got to move back in the other direction at this point well as a as a precede like very first probably first money in

35:33right 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 right like you have to spend some money to figure that 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 because i i've i've i've worked with um you know subscription out founders who are like super super early who are like we're trying to get our ltv cac and i'm like hey just get some subscribers and

36:07talk to them like let's do that first right do you think that that that should move earlier even like people should be doing this like in the first like couple hundred subscribers kind of 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 are 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

36:35how 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 and for those businesses i would argue that they need to tackle like the question of whether people are willing to pay you for this thing early very early because if they're not then you're going to kick the can down the road and eventually somebody will figure out that no one's

37:02willing to pay you for this and you know either that's going to be the market or it's going to be you but either way you can make 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 um i think it depends on the business but if you have like absolute certainty that eventually 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

37:27people 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 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

37:58it is in insanely hard work like you know being a founder gets glorified because there's winners bias and whatever but it is very hard we made 90 in the first six months it was great yeah right exactly right it's it's extremely hard and so i try to just be honest with founders and just tell them what i think they are probably a little bit scared to hear but that is like the reality situation because like i don't want to see the worst thing is like when you see a founder that is like putting their entire life into something that you just know is not going to

38:28not going to be able to succeed and of course they're going to 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 in 10 years ago

38:56it was much more like the tinder path like hey get active users right on something we know you can monetize later was very much the advice i 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 you know 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 right if you're technical um and and that has probably changed structurally just how this whole thing probably for the better right because we can we can skip some of that

39:30guesswork 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 um yeah the efficiency that these tools have created is just frankly remarkable which 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 flip side of that is the like world of ios 14 as it relates

40:07to um as it relates to like acquisition has really put a put a dent in the the acquisition ecosystems in consumer companies i mean in all companies but consumer especially and it 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 uh 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 what we basically saw as we looked at companies across you know the ecosystem is almost all of them had an immediate spike in

40:46meaningful spike in cost of acquisition of a customer and some of them so much so that you know and and i bring it back the companies that were playing this game of uh 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 hosed they went upside down very fast because they had assumed the 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 going to make on their customers and so it really has i think that also started to force

41:20you know 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 has forced companies to some extent to think differently and to be more disciplined 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 yeah uh felt like a little bit like sky is chicken little um but i we haven't

41:53done like a broad-based study of our data but like anecdotally it's kind of what happened like um a lot of businesses that were on the bubble just can't exist now and maybe you're right like maybe it was 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 market yeah well it's not helpful for them either i don't

42:23think it helped anybody no no it hurts everybody and i listen i would also say it has become harder i think to get a d2c 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 your competition goes up and you also have to like really think deeply about the raw cost of acquisition relative to your

42:51subscription but you know if you're going to 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 that so like calm or whatever the late stage

43:21ones 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 because 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 going to buy the easiest to buy users first right there is unquestionably a brand element to it but i think

43:52people 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 can't as much as i like the brand i'm still going to cancel the subscription like i you know so brand yes but it really is product first like 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 nobody

44:20keeps their calm subscription if they're not really using it or intending to use it right even as much as they like lebron james that's exactly right i could listen to lebron i mean i grew up in cleveland so i could listen to lebron james all day long but you know if i get on a calm thing and like all of a sudden it's like some offensive recording um or something like i'm just gonna you know i'll just cancel it as much as i like com yeah and uh to switch gears because we are we are kind of wrapping up on time i i did want to get the the you kind of

44:46touched on it a little bit but i want to hear more about give us the elevator pitch since we're we only got a couple minutes left of course and capital um and then are you currently accepting pitches and how would how would people get in touch with you for that uh yes we ever every day is the answer to the question um look we core zone uh capital is on its third fund we closed a fund 134 million dollar 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

45:18conversation 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 uh we there we feel like that's where we can be most helpful to founders so that includes marketplaces subscription businesses d2c ecom um we do do some b2b as long as we can really understand the pain point uh 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 uh we're early stages we're high conviction so we'll invest enough to own eight to ten percent on a first check

45:52because 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 um you know we are like i said more consumer than b2b uh but we do do both uh how do people get in touch with us linkedin is probably the easiest way 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

46:21actually in that order you know and if it's a space that we if it's a business model that we understand a space that we understand we'll get conviction even if it's a powerpoint deck um so it's not you know we're happy to go we're happy to go really early uh yeah i was mentioning before the call that 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

46:52general as you know if anybody considering taking venture capital like you don't have to exclusively raise from folks who have operated businesses but that's where you're gonna get the most additional leverage out of um you know selling off some some equity so um definitely the right kind of uh folks to add yeah no listen i think well i appreciate you saying that i think look i don't know there's a right or wrong way to get an adventure this is just the way that we know how to do this is what we've done and how we know how to do things and i think to your point

47:19to me if i'm like 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 like it's it's all very easy when things are up into the right but when things go wrong like who do you text like who do you call because you're if it's a non-operator investor they don't really want to get that text from you so you know whereas like you know we've been in the trenches like things go wrong all the time and i always if i found again whether it's us or somebody else just be thoughtful

47:48about like how you construct your cap table and never underestimate the like duration of the marriage that you're entering into especially for precede right like those are the people you spend the most time with if you're successful 100 100 so like think about just think deeply about you know who you want on the cap table and what compliments they provide and everybody can you know i love the early stages it's pretty collaborative generally i mean much more so than the later stage as like a venture community and so we think all the time about how you know how we can construct a syndicate for a company that

48:18is like one plus one equals three so we play the role that we play as like x operators and very tactical but we have you know funds that we'd 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 but uh with that we do need to wrap up thank you so much for for your time today so many fascinating uh conversations and things to learn from so thanks phil for being on the podcast it was my pleasure to make sure you never miss an episode subscribe to the show and your favorite

48:47podcast player thanks so much for listening until next time [Music]