The Subscription App Industry Rebound — Eric Crowley, GP Bullhound

0:00hello I'm your host David Barnard and with me today Revenue cat CEO Jacob idy Our Guest today is Eric Crowley a tech investment banker with GP bullhound where he provides transaction advice and capital to top companies in the consumer subscription software space on the podcast we talk with Eric about the rebound of consumer subscription valuations and investor interest how to generate net revenue retention in consumer and why you should pinpoint where your app sits a m hierarchy of needs hey Eric thanks so much for joining us on the podcast today thanks guys always great to be here really appreciate you having be back fifth time on the podcast you're um most seasoned

0:42guest it is quite an honor this is probably one of the things I look forward to every year to do is this why you do the report now you're like if I don't do the report I'm not going to get on sub club and that would just ruin my year you guys are so popular these days I have to keep my game up in order to get off docket gotta keep up and and Jacob nice to be talking to you today as well I'm here I'm good I'm underprepared which is great cuz like uh Eric is overprepared so but it's good I'm always excited to I

1:12don't know we live we live the macro at Revenue cat right like dealing with customers every day but like it's nice to get a chance to zoom out and look at the industry uh a little bit more broadly and make sure it's still here and still growing so yeah and that's actually exactly where I wanted to start is that uh we produce the state of subscription apps report every year now done the second already planning the third for 2025 this is your fifth or fourth CSS report and I feel like your report in the fall is always this nice kind of state of the industry you take a

1:46much broader look at the industry than we do in our report and so it's kind of a nice balance and you know reading through a drafter report this week I found a lot of really interesting stuff that I you know hadn't been thinking as deeply about but I did want to kick it off just kind of talking what is the state of the subscription app industry how are things going from your point of view on financing and m&a and all those kind of things yeah so well thanks for having us guys I think you know for people that haven't seen our report before we were an investment bank and

2:15Venture Capital funds so we come at the CSS industry is kind of like from a transactional industry we're not Builders like a lot of your listeners are but we are you know advisors or investors into businesses in the consumer subscription or as we call it CSS industry so our report kind of comes at it from that angle which is you know how do you make how do you invest or buy or sell companies in this space I mean you guys know this from seeing the data at a micro level right the industry went through a huge boom in 2021 tons of capital came flying in which meant tons

2:45of capital got spent on marketing and growth and new ideas and then some of that Capital got put to waste unfortunately so like 22 23 was a rough year for a lot of these companies like they over hired their marketing returns went down down they weren't able to scale nearly as fast as they were hoping and so you saw a lot of pain kind of happen in 22 and 23 with some companies gr a business a lot scaling down switching model pivoting to B2B e-commerce for subscription but what I can tell you now in 2024 is is things have probably never been better A lot of

3:16companies took their medicine a lot of really great Founders and Builders kept their head down and they kept doing exactly what their mission was which is serving their customers and we are seeing better opportunities and better companies now than we even have in 2021 so companies are growing quickly they're growing profitably they have retention rates that are just fantastic and so you know from a as an m&a adviser right we generally see what we see your companies coming to Market when they're when they're ready to do something they'll give us a call and so we've got this window you know usually six to nine months before a transaction happens with

3:51hey we know what great businesses are coming to Market so it's we've probably never been busier which is obviously exciting for me but hopefully it's exciting for the industry over the next you know six 12 months as you share in the report that's not only the case in these private conversations that you're having with apps looking to sell or raise or whatever but we see that in the public valuations as well like dualingo is trading I think at an all time well not an all-time Revenue multiple High compared to the 2021 bubble but it's certainly rebounded quite a bit since the drop yeah I think you see that

4:23across the board with with some exceptions right there are some businesses that had huge Co boms like some of the dating services that just weren't able to keep that level of growth up they've said hey we we probably over hired overspent we're focusing on profitability which means you know their growth slowed and their revenue multiples come down but there's still fantastic businesses trading good Revenue multiples and great multiples so I think that's you're just seeing that shift but that's also happening across B2B software is happening across technology where you know if you're not one of The Magnificent Seven you are a valuated on your per financial

4:55performance and so Revenue growth and EIT of margins are becoming like the market evaluates CSS business just as they evaluate B2B SAS businesses yeah in your report you mentioned this idea of exceeding the rule of 40 I didn't quite Gro what you meant by that in the report I would love to finally learn the rule 40 because I've pretended to know it on occasion but it's bantered around a ton in the investment universe and it's almost starting to be debunked but for listeners that haven't spent time on this and hopefully they haven't they're building code rule of 40 investment term so you take your year-over-year growth

5:28rate let's just say your year-over your growth ratees 30% and then if you have an evit of margin or cash flow margin of 10% so your the dollars of your cash flow you have divided by your Revenue right that's and you add those two together you take 30% plus 10% that's 40 at least 40 right the higher the better yeah the goal is the goal is higher right and you can grow 60% and lose 10% on EIT margin so you're at rule of 50 that still means you're doing well and so in the public markets I think there's a slide in the report for people to see

5:58there's a really high correlation on what multiple you trade on or Revenue multiple with what your rule of 40 score is and that's been really intriguing but there's even another data point that'll be in the report which is the rule of X which effectively so once you guys understand rule 40 which we just did a quick inent on now there's a rule of X which effectively there's a higher correlation with companies that are growing faster so if you take the math and say instead of just doing one Revenue uh growth rate plus the EA margin now if you do the revenue growth rate times two and add it to the ebit

6:29margin so kind of over waiting you're having over waiting the revenue growth rate that's actually even a higher correlation correlates to about 60 70% of the stock price vers you know the other one was cl the ru of 40 is closer about 56 and so basically that's just a you know a heuristic is that something you guys came up with we definitely didn't come up with it that's I think one of the investment funds bester I think started bmer did rule of X which is pretty cool just like a they're just coming up with like a a better model to match like trading values with like

6:57growth rate and profitability it's just ruled thumb yeah cuz the thing is 40 somebody just said like at some point 40 is good above that is good and below that is bad well first of all it's mathematically heinous to add your growth rate to your EIT margin they are both percentages but they are apples and oranges right like it's a weird thing but it does happen to kind of give you some information and like with the number 40 at least and and maybe if I say this wrong ER correct me but essentially like if you're growing more than 40% a year it's okay if you're not

7:29not profitable because you're growing 40% a year that's fine like you can burn some amount you know for every Point you're over 40% growth rate if you're losing that percent on your margins cash flow margins that's okay but if you're below that if you're sub 40 probably you should be cash flowing or at least like you know be profitable but again that 40 number was some number some investment person put on the board at some point but it's notionally correct and interesting but it's also telling if you're if you're growing at 60 and losing 40 then you're not hitting the rule of 42 so it's like you can't also

8:02just be lighting cash on fire like it was 2021 for Revenue cat like we've gone above and below for different reasons like we've had years where our growth rate is really high but our burn was really high and we actually were below the line and then we've had years where our growth rate stayed high but we actually got a little more fit fiscally still losing money but like in a more responsible way I don't know this it's this is a thing that probably doesn't concern concern any SAS company under five or 10 million in re Vue I don't think you should be looking at this but

8:31when you're at the growth and scale stages it can be a helpful like way to look at your business it's a rule of thumb it's like walking 10,000 steps a day yeah I mean if you're not looking to exit focus on building your business right build the right thing for your customers the these humanistics these rule thumbs like they'll work themselves out and then to point right like it's a data point in a moment of time right a company is not a data point it's it's a linear progression step one step two step three step four so there may be years where like yeah I'm going to spend

8:58a crapload of money because there's just huge opportunity yeah and often that's when you need to right like if the top of that number your growth rate starts to flag you might need to burn a lot more money to like change the product or like figure out a new growth thing it's nothing submit it's just investors like simple analogies to help them narrow down investment opportunities and this is one they use so yeah so we report on it yeah super handy for folks in the audience so I mean I think we'll probably have folks doing tens of million dollars a year listening to this podcast thinking about when the right

9:25exit opportunity is and what kind of multiples so yeah a great rule to to kind of optimize toward if you are looking for some kind of exit or funding or otherwise in the short term yeah you should at least know what your metric is that's the best way to think about it seems like m&a has also been hot this year a lot of CSS businesses on the Move yeah it's been it's been good I mean I think it's still early days there's a lot more coming I think we've been working on a few you know there's a bunch of other ones like the S Max just

9:56bought buddy fit in Italy which is Fitness right if you think about like fitness apps still doing deals that's pretty exciting you know outside just bought Matt my fitness which is from under Rover which is a cool deal I was actually a Founder buying back as own company you know there's there's seen a bunch of other cool stuff that's happening and I think we expect a lot more to come so like Benning spoons has been busy Francisco partners for the weather company which is pretty cool we helped Team snap by Mojo you know that business in the Youth Sports space which is we're really excited about that and

10:26then you know there's been some financings that been really exciting we were fortunate enough to work with flow Health you guys know the female Health business we're just an absolute phenomenal business we helped them raise a really nice round from General lanic so it's been been really exciting I know you can't go super deep on Flo but I did want to go a little deeper and you talk about it some in the in the report but what is the investment thesis I mean you know what was announced publicly is that you know they raised 200 million at an over billion dollar valuation and then in the report you even share that they

10:57went out looking for 100 million and ended up in a very competitive situation where they raised it to 200 so what you can share publicly I'd love to hear a little more uh color on on how that happened and what the investment thesis was behind such a high valuation and then the competition to get in on it yeah so so Flo's been around for a long time founded by Dimitri you know years and years ago and I've known him for you know since 2019 since I started in the industry so Flo is a female Health focused business it has a fremium model so I think we've disclosed this but

11:31there's you know North of 60 60 million Maus and then you know a fraction of that are actually paid subscribers and so floo a great job of providing females and now they partners with information around reproductive Cycles menstrual health and now they're moving into param menopause and menopause which is just really really exciting and so the thing that about this space and you'll talk about this when we get to consumership like other consumer subscription areas is it's super crowded there's tons of you can use Aura you could Apple Health there's and those are big names right that everyone knows and then there's tons of other female Health Focus or

12:04period tracking apps what we really like about flow is that they will work with with females early on when they're kind of like just the very beginning of their health Journey you know 15 16 17 right and they'll provide a free product and they kind of create this data layer between when they're 18 all the way till they're when they're 35 40 50 moving to parent menopause and then what you do is you can provide free services to that individual as much as they need and then when they do need to move into a paid program right there's modules effectively that you can subscribe to you get all the services of flow premium

12:37but you can only maybe only use one or two or maybe use all of them but the cool thing is they're just there when you need them and so then what I think the thesis from from GA was is you can just continue to stitch and add new offerings to the flow off to the flow data layer and then that just increases the surface area for where their you know 60 million Maus will find a reason to subscribe and even if you capture one two 3% of those with each new module that's hundreds of millions in revenue and so we were really excited about it I

13:04think the thesis was born out a lot of investors saw that potential you know we do think this is probably a public company at some point we're really excited about that and it's just going to be another great CSS business that's in the public market so yeah happen to answer any questions but obviously have to keep most up confidential yeah I mean I'll do some analysis 60 million there's a lot of people there's billions of potential users on the planet so that's a very good uh thesis and then I think we've seen this play out multiple times that like data generates attention right or like the more somebody invests in an

13:35app and the more time like horizontally it has with you like the higher your retention is going to be and that's something I always it's not a debate we have so much anymore but I used to get a lot of people asking me like oh should I make this a subscription app and like how do I like structure an app that's like worth adding a subscription to and I think I always celled and I still believe this that like something that in gets better over time will have naturally one it'll justify a subscription because it's something people use for years and years but then also like the value goes up it compounds

14:06you know over time and so yeah I think this is a very natural large human need large Tam you know it's a competitive space so it's interesting that there's there would be one to emerge I mean that does seem to be kind of how markets develop over time is like once somebody has kind of figured out the optimal combination of current available Technologies there will be like a small oligopoly so that doesn't surprise me but it's interesting to think like there's probably other categories that haven't developed as much as Flo and I think it still speaks to the maturation 60 million that's like nobody you know

14:39what I mean I don't know what the total number of customers because there's some slices on that from 8 billion people down but like but like obviously we've barely began yeah you're you're hting on the concept that we call category Killers Jacob and we talked about it a little bit in the last report where in consumer right consumers flock to best of breed and they learn and decide what best of breed is because other consumers tell them is word of mouth is such a such a dominating channel right and so you know Flo is really special I think Demetri's talked about this where they get over 50% of their users are organic

15:09right they've got great app store rankings right people you know moms now are telling their daughters friends girls in school tell each other about it right so it's it's really a powerful flywheel and so we kind of saw this in new sports like we saw you know we think there'll be two maybe three winners in US Sports we think team snap's one of those we have a couple predictions around Financial Services AI news big one in family health or Family Management we call the chief household officer we think there's going to be a unicorn there too and I think that's what our CSS practice is oriented around

15:39which is helping find those unicorns early on helping them get to like the next level and then hopefully seeing them go public but we think there's a lot more to come so we think flow is a perfect example of what will be a lot of future public companies the things you mentioned in there about flow and then also have a whole slide in the report about is finding ways to generate net revenue retention in consumer subscription and those two acronyms don't usually go together CSS and nrr at least positive NR yeah ex can be positive or negative so but yeah I'd love for you to walk us through your

16:13thinking and you kind of already talked a little bit about it with flow and kind of expanding the product but what are some of the other ways that consumer subscription businesses can start thinking about nrr being a possibility instead of just always being a kind of net negative with all the turn going on yeah so the biggest so when we started the CSS practice the biggest thing we had to overcome was people were like well this isn't B2B SAS the big thing that people love about B2B SAS is once you land a customer hypothetically you could sell them more seats over time right so that you know you start with 10

16:47seats then you go to 20 seats then you go to 30 seats so like you know sales Source sells a customer right they can gradually grow with that customer and that's really exciting right because the cost of Landing them takes one time and then you add more Revenue it's becomes an extremely profitable business model the issue people think they see with consumer is that you sell a consumer once and then that price is capped right you sell them for $29.99 for example for a year that's all the money you'll make from that individual best case and then there's such high churn that you never get this positive net revenue retention

17:18and you know the answer is that's not true it's not oh it's not common but in the best of breed CSS businesses the way to think about this is every consumer subscription business has churn and most of them are high churn the question is when does that churn stabilize like when do you find what we call within our in the in our gbb CSS report like the locals versus the tourists so to use an example if you start with 100 users and you turn 50 in your first year all on annual subscriptions you're down to 50 users and the second year you keep 45 of those 50 right so now you're at 40% but

17:50then the third year you keep 43 right and in the fourth year you keep 42 so now all of a sudden that Parabola has just flatlined and so like effectively you're dollar Revenue retentions equal but then here's where the nrr can start to play in is CSS businesses have figured out you can do price increases so we have this on our report which we kind of graph Amazon's Prime subscription Netflix's cost and Hulu's cost because those are all mostly public and they go up every two years right and so all of a sudden now you're seeing pricing expansion which is David you kind of ask like how do you get nrr so

18:20now if you have a flat cohort number of users you're just adding price increases right which can overcome double digit compounded inflation will help uh Drive the to being accepting allow you get away with that that's for sure but then you see other ways to monetize right like Spotify do lingo they La family plans so they now they acquired the mom and then the mom brought in out for the dad and the family so now there's a family plan so you just got uh you had user expansion with that same one customer you can upsell new features right like quickin onx they've onx launched like global maps right versus

18:52just your state maps you can upgrade to a higher tier quickens adding like estate Planet tools really cool so if you already on their financial man the software now you could do wills and trusts and have like a locker to store like important documents that's an easy upgrade for users and so we're seeing some really cool ways that c that CSS businesses are generating net RIT retention but it does require you to really dig deep in the data and understand you know how do these businesses work how do what are consumers value and then once again like back to the point how do you bring more

19:20value to that same subscription which may justify a price increase or just keep them subscribing like both of those things be could be useful it's really not a lever worth pulling until you've in CSS until you've compounded a handful of years and like you've got you've got a base of of sturdy longterm subscribers that you can when risk to churn them a little bit but then also just to have a body of like long-termers that you can actually either offer something to or even a price increase I don't think the price increase thing is yeah I think Netflix and and Disney did a good job of

19:52Paving the expectation for that from a consumer perspective simultaneously with a price increases and pretty much everything everywhere I used to be very against this because like I thought I don't know I just thought it was like a not worth doing not worth the negative press which again I think for most scaling early stage it's not but when you're late stage when you've got like a very mature subscriber base and you're starting you know that 40 doesn't add up itself you know what I mean you got to like you got to find each point like I think there's I think there's a case to be made that it's it's it's an okay

20:25thing to do you have to justify it to your users right you can't sneak it in you send an email you say hey guys we're going from $29.99 to $ 35.99 and here's why here's all the benefits you're getting for that extra six bucks once again like if if they're truly your users right if they're truly people that have been subscribed for two to three years and they're like yeah I use this product every month or I use it once a year for my big camping trip or I've log into this every day they're not churning just send them a link to the uh inflation report for L you can aest like

20:53a lot of companies AB test right they try a little bit see what the retention is but generally like what I found with most of my clients is that if you're a best of breed and you're producing a good quality service people are going to get it yeah you have margin you have uncaptured margin basically right like that's what you're leaving on the table it's not just trying to get a fair price and I don't know I think there's some argument that you can have like an asymmetric power there like if you've like captured people's data and like you know I don't know I think it's there's

21:19some there's some amount of balance you want to do there but you know I don't know ideally we're finding the uh the optimums of pricing yeah I don't the value capture thing I don't ever buy into that because there's just a lot of options for consumers so like if you offend someone right if you personally offend them with however you message it or like hey you can't turn because I've got your information they'll be a little pissed right and so like when you're creating this this desire to get back at you all right so like you don't want that you just want like hey guys we're

21:51doing the best for you but this is what's best for us so let's just meet in the middle and I think consumers are totally fine with that I think Founders typically depending on how close you are to the product it's probably once probably once you're talking about rule 40 this is no longer a concern but when it's like an aour person who remembers not charging anything for their product it can be very very uncomfortable because some somebody will be pissed and like you just have to be okay with that for sure it's got to happen if you weren't okay with one person being pissed you probably shouldn't have

22:18started a company or built an app because like it's just comes to the territory a little bit we haven't talked about yet I don't think you explicitly mentioned in the report but a lot of CSS business are also cracking the codee on on onetime purchases as well of like add-ons dualingo being a great example of that I don't thinking their numbers they're showing because they do still have pretty high turn so I don't think they're anywhere close to nrr positive yet but they're driving that Direction with the like buying the I forget what all the little things are like you know streak recovery and things like that

22:53it's definitely something apps can and should be exploring for sure I mean tenders been doing this years right you could buy Baskets at Super likes right they're not a subscription but it it enhances your ability to use the product right I think I think we're going to see more more of that with CSS especially as you can do more and more targeted customization around offers around the products you're actually selling with some of these AI tools there's you could do one-off maps you could do specific layers I think you see this in a lot of the prosumer tools right if you want to create your own personal template or

23:22email template or something like that that's a that's a onetime purchase so there's there's a lot of cool stuff coming and think I think it's just going to get more interesting so I think David cheer point stick to the subscription that's where the vast amount of money is but if there is something you could offer your users without taking your eye off the ball on the subscription I think it's something to Think Through we've kind of been talking mostly about the upside but there also are a lot of threats in in the industry and one of which directly applies to flow and I'm actually going to have the uh or we're

23:52going to have the uh the founder Demitri on the podcast soon and so I've actually already spoken to him so little preview of that episode but he had some interesting thoughts around when Apple Health came into this their space you know they introduced period tracking as a default part of the OS all Trails is facing that with iOS 18 adding uh hiking Maps right into the built-in map so how do you think about the threat of platform owners expanding into these product spaces most of these Services rely on Apple and Google for some some level view their customer some features right using the hardware that Apple and Google I'm kind of

24:32focusing on those two but you could expand this to Oro you could expand it to whoop are generating right and so you're at RIS there and I think you know let's just kind of focus on Apple right because they generally get most of the the slings and arrows tossed at them is there a really valuable participant in this ecosystem you can't knock that but I think they're starting to get a little pressure because they charge pretty high fees right the 30% fee and then they also they have a history of this term sh loocking which is coming from a historical thing they've done uh with another app called Watson well they'll

25:02kind of copy features that are highly used in some of their main apps and kind of just continue to build the Apple service ecosystem and so I mean you guys probably see this from their public report it's like their hardware sales are slowing their services sales are growing like wildfire and so a lot of stuff they're offering for free like Maps they'll put the all Trail or the hiking Maps into the map Services message to get more people to use maps right because they can start to sell more and more ads off that the adding more data into health that helps them sell watches that's a value ad service

25:30for them if you're a founder and you're building I think one of the people always talk about is Apple demo day is startup death day right you just never know when Apple releases something if that is perfectly designed to what you were trying to solve for and so yeah it's a competitive threat there's no denying it there's no papering over it but the Silver Lining is is like apple is a big Juggernaut they bring a lot of people awareness to the category right so the certain thing they add to it people now become aware of that feature they'll look for best of breed so if you're a top 20% app this could be a

26:01benefit for you right but you have to constantly keep itating you can't just build an app like you know to use all Trails as an example they can't just stop doing stuff and say well we're good right they always have to be 10x better than whatever Apple's offering is Right more photos more reviews now they're doing social features right Apple doesn't do any of that you know what happens is I think you know you've kind of use flow and all Trails as an example like apple May clip off a couple percentage of their free users but what they don't do is they don't take the people that would pay for all trails and

26:30flow those people do not just stay on Apple right they're trying to look for a premium experience so they will go preview but if you're use the negative side right if you're an app that hasn't invad you're kind of just a me to app sitting at you know the bottom of the ranks the rankings and the app stores that's hard it's a hardest CP to be and so investors are pretty smart about that so you have to be really knowledgeable and ability to overcome like that challenge question which is going to come up I like the way you frame it in the report too that uh there's Broad and

26:59shallow which is what the platforms do it's like they like when they introduced period tracking in Apple watch like they had to do it for the masses it's it's Broad and shallow it's not a super deep feature and then flow is like the exact opposite and then the way you frame it in the report is verticalized and deep where they have so many other features and layered upon like to your point earlier it's like the things that people are going to pay for in flow or the things apple is just never going to add to this Mass market app so the the best def against sherlocking is building a real

27:32moat with that depth and verticalized product offering instead of doing that kind of me too thing that puts you at huge risk has there ever been any other app besides Watson that was sherlocked actually sherlocked right yeah yeah I feel like it's something everybody talks about all the time but it like never actually like who was it recently one password cuz they Apple like upgraded all their password stuff and everybody's like w one pass password's over and I'm like like we use one password business syncing all of that stuff crossplatform no never in a million years like they're going to you know well one I think

28:09probably people are overtuned to the Apple ecosystem talkers you know who think like oh I'll just do everything through Apple I don't know I just don't think there's been actually that many cases or nothing meaningful to kind of to Eric's point it's like the meos yeah sure maybe they got dropped off but like nothing we care about I I think maybe I would think twice if if there was a great like OS level solution already I might think twice about starting something new in there but if you're already in that space and I guess yeah if you're not like just nent like very beginning if your product has any sort

28:42of differentiation whatsoever like Apple and Google or whoever they're building it because there's something there like they would not care unless it was substantial and so I'm a Believer in most of the time it's it's kind of a boon or at least neutral the exception of maybe a few cases but if you're best read so think about it like from a notetaking standpoint right Notions probably going to survive any AI tools that Apple integrates into notes right they'll probably survive or there's a bunch of other note taking apps that may have a really rough time capturing customers so notion probably fine right and I don't know notion you know have

29:15noidea information but if you're someone else and they're in Ai and apple all a sudden integrates like bunch of other tools or kind of starts to look a little more like Google Docs within their notes platform that could be a tough spot to be I'm using some of the transcription services and Apple's voice mail pretty good right so if you using something a separate product could be a problem you can't stoping in the space just cuz Apple exists it's like what people used to do in social networks like oh my God Google's doing something Facebook's dead well no David I'm trying to are there any are there I'm trying I can't think

29:43of one tool that I've like switched to the OS level on you know the notes is a good example though because as Apple added more and more to notes this was probably five years ago I stopped using a third party Notes app it's true yeah cuz you used to did not have sync like their sync is really good now and like it's a great app yeah yeah it's really is a fantastic app but it's not like I never used Evernote I was using actually perfectly validates Eric's point it's like I was using kind of a more barebones me to third party Notes app that didn't didn't even have like super

30:18sophisticated syncing wasn't super feature Rich and so moving the Apple's notes just made a ton of sense as they've added all these features but I wasn't an OTE kind of power user yeah the AI side though too it's like the system level Notes app will now habituate users to some of those features and then Apple's not going to update them but once a year if that right and so now everybody else who building AI integrated has like a warm-up app that everybody uses then you're in class and you see somebody next to you using something crazier and you're like oh you don't use whatever and then it's like well I'm going to

30:50switch to that right so this stuff's so Dynamic and so like hard to fully characterize like consumer behavior um that yeah I I think it's overblown so now that's a fantastic Point like apple is unlikely to integrate AI features into the notes app at the level that would kind of be meaningful for me but now that you bring that up I would actually I mean I have so many notes now going back five or six years since I like started using it more in depth that like hard to find it would be hard to switch right no no no but I'm saying it's like more incentive to switch with

31:23AI companies really get aggressive with better tooling and finding and drag search and all that kind of stuff yeah because the AIP specifically we didn't put this in the report but if you think about it they're going to need access to data right and so they will want specific requests like access to your contacts access to your calendar tools Apple's going to be a little protective on that but which one of the consumer is going to trust to unleash an AI engine on their own personal information so I think there's there's a double-edged sword there too like I think the routers and with the builders don't they'll

31:52integrate AI tools so much faster than Apple just factor of like probably 3x two to three years ahead of Apple but if you want to trust someone with your data source like your course data like contacts or calendar Apple might have a slight Advantage there so you really have to connect with this premium offering or get that consumer Buy in which is like hey what are my friends using do they love it cool and I'll then I'll use that app I don't want to go super deep because it's it's just been talked about a ton but because it is being talked about a ton I'd love to

32:19just kind of get the read of the room on like the dma and all the regulatory kind of overhang we have it's over G resigned it's going away right I thought he just when he left it's over no that's not how Europe works okay I have to do but how is that like being priced into Acquisitions how is it being priced into Investments how is the investment Community thinking about regulation both positively and negatively yeah I mean so on the TMA side and focusing on here for people that don't know what that is it's the digital markets act so it's it's a it's a legislation instituted by the EU and I

32:56think what it's designed to do is was kind of loosen the grip that some of the large platforms specifically like apple Google have on Independent developers and there's a couple areas right they kind of restrict payments for one which that one's very focused on but they also restrict a lot of other stuff like how you do marketing discounts offerings stuff like that customization app review app review yeah I just had a couple run-ins with app review in my side project app David suddenly Pro dma like he's like I've never been more French French legislation that now so but I think like this is something like the EU generally has been on the

33:33Forefront of privacy they're what they do generally sometimes or occasionally filters over here to the US but it's pretty hot topic right now it's really hard to price right so everyone's kind of saying like can I just assume Apple's 30% goes to 15 and the company gets 15% more profitable no can't can I tell you for sure every one of my clients is looking at some sort of a web subscription offering for sure right and those are getting better and better I think Revenue CS work on stuff there's a bunch of other names that are that are thinking about how do we offer a web subscription tool that provides the same

34:04features that the App Store does which is user management taxes payment making sure that like you're collecting taxes can properly in every jurisdiction with all V at a 5 7% commission rate vers 30% right and I think there's there's going to be some big changes once those products scale and they get really really good which the aborts had a 10year lead on doing something like that I think consumers are going to be comfortable to take a 10 20% discount and sign in through the web real quick and then come back to an app I think we're going to get trained on that just like we got trained on how we do

34:34subscriptions yeah so hard to say what else will happen in the next couple years but it's definitely a Hot Topic yeah I mean there's there's been a lot of energy around the like web funnel capture and there's been some new tech that's people are building tools for this but none of that's like driven by the dma like a lot of that was allowed before I will be interested to see if any of these stores reach any sort of like Escape velocity I just think the size of the market is too restrictive for it to reach any sort of meaningful scale National internationally and honestly this is

35:06like we're recording this the week after tiar Bretton I think it's his name who was the head of dma resigned or was asked to resign which I do think I do think Mark's kind of potential I mean who knows I don't know what the internal politics of the commission are but I think like Mark's potentially a SE change I don't know if that means the dma will change or at least like maybe enforcement will not become a thing anymore but he was pretty actively harassing this last year on specific details like you can imagine a version with the dma is out Apple shipped their version and

35:35then the EC just shut up and it that was it but like we've gone through the last year where it's been tick and Tack and back and forth and a big uncertain mess even if it just goes to back to like okay the status quo I think that's good for I mean maybe it's not the outcome everybody wanted but I think that's good for the industry in terms of like maybe we've got some stability but yeah I'm just I'm just hopeful maybe it'll be a little less exciting uh the next year uh would be a dream for me people like predictability and stability it's true I

36:02mean it's it's it's cliche potentially but like hey like I you know and if we want to build anything with these platforms or these changes or this openings if we need stability and we need like time to like be like okay how do we actually integrate this stuff but yeah going back to your prediction that just there will be more people driving to the web I just think that's generally going to be true I think experiences though will still stay an app I'm still like a big believer that the user experience Delta between what can be provided in a web browser and what I think there was there was a decade there

36:32where we thought the web browser would get developed enough that it was going to overtake but the two biggest makers of web browsers are Apple and Google so they have a big incentive to make sure the browser never gets too good right so I don't think we're going to see that anytime soon this trend though is also kind of on Apple right and so there is Tools in their Tool Shed to to reverse that Trend a bit like there are ways that they can more strongly incentivized in that purchase and and like to your point earlier Eric like the tools for doing these things aren't fully mature

37:05like stripe just bought lemon squeezy I saw a job posting for a like manager of merchant of record so it's like stripe is looks like they're building a strip branded Merchant of record similar to what paddle does but it's like they're just now doing that and so like there's not and then even stripe today doesn't support all the countries and all the payment methods and all the things that the App Store does and so there's potential here for Apple to innovate and that's what you want in good regulation and good policy is to force somebody like apple to be more competitive versus just collecting the 30% and r on their

37:44Laurels so I'm kind of curious to see what happens in the next couple of years if they kind of fight back a little none of this was dma triggered though paddle and like all this stuff was happening already and apple may or may not react and actually that was what caused it right but I'm sure somebody will be like well then there was the dma and then Apple got better and it's like well no I think they were going to do that anyway but okay yeah good point but yeah it's still gon to be interesting to see what what happens and I'm especially curious to see what Apple does to kind of shift

38:14that because there's definitely a trend toward it like Eric was saying like there's a trend toward people trying to capture more and more on the web to avoid that 30% so like surely Apple's has seen that and is uh trying to figure out what to do and then surely you know Google as the other half of the oligopoly it will either follow suit or have their own Innovative approach to uh trying to win some of that back in the report you talk a little bit about IPOs and how CSS relationship to IPOs I think we had a really interesting time right now in the public markets or lack

38:46thereof I think was there been like four IPOs this year so I'm sure there's been more but four that are like on my R it's been extreme probably one of the most intense droughts in public and that's in the B2B side even so when when you look at consumer I have to assume it's been actually worse so I'm curious like you know on the less it seems like more deals that are less than going public more like private Equity Acquisitions and stuff like this but how do you see the I guess the IPO Market broadly and then how it applies to this segment yeah I mean I think your de on jig like IPOs

39:15are down big from 2021 for sure 2022 I don't think we're even at 2018 2019 levels so I think there's a lot of investors hunger for cash but there's a lot of private deal like strip's a perfect example you mentioned them earlier they've done tons of secondary deals right so instead of going public they're like cool we'll just collect a check and be able to pay out some of our inv yeah and the only loser is retail right yeah so like they just go public later right like so that's that's the risk like just to put like a quantifier on it they're at billions of Revenue

39:45right like they're at an insane scale and like there's a lot of consumer business that went public like an all birds you know that when public during kind of back this back time frame they went public wh packs it's super hard to be a some scale public company but doesn't have some level of predictability right even Bumble which is a household name right that's got billions of Revenue their stocks got pounded right dingo's done really well so it's definitely a have and have nuts do you think there's a world where somebody replicates dingo success in the public markets on consumer side I think I might have worked with one recently

40:18yeah okay so I definitely do I think there's great CSS businesses that are starting to scale you know if you start to get to 4 500 million in revenue and you're predictable like public markets like that right if they can see that path where hey you're going public at 500 million now you're closer to 7 on no way to 750 profitable on your own destiny people buy that it's easy numbers to say but when when you talk about like just like to get to that scale is such an insane journey and like just numbers like how many subscription apps at least like purely I if you just

40:51look at like just iOS apps there's maybe 15 like even in that realm I think there's some pretty good ones out there I mean you can kind of start going like down the line right there's people everyone knows straa right couple hundred million you've got D youve got Discord right all of a sudden that's a pretty big one right or a kind of a hardware manufacturer with a subscription offering right where you know they're probably someone that could go public and kind of compete with a Garmin right with the health and wellness right that's there's a play there I think there's more than you think right there's a lot of information

41:20I have that I probably can't chat through there's great companies out there that are at serious scale that just don't want to go public yet is constraint on the um companies not wanting to do it because of like the blood in the streets like it's it's gnarly out there or is it more on the buy side there's just like public market investors aren't really interested it's a little bit of bull right like if you're a founder and you're like man I'm still just trying I'm growing I'm growing I've got a lot of things going on I'm focusing on product you want to go deal with the public markets and do

41:46corly projections no oh you weren't asking me that was maybe someday you'll get out not that I'm at the scale not that anybody think but you got to you know but so then then you look at the the public markets guys right and a lot of those guys have taken a blood bath yeah I don't know if I've ever met a Founder whose uh Public Market stock is higher than their IPO price that just might be a unique time in my life there's a lot out there there's a lot out there presumably went IPO in like 2002 or something I'm guessing if you IPO in 21 good chance

42:18you're underwater well hey as we record this the FED just dropped uh 50 basis points so uh money's free again right yeah great great uh should ipoed yesterday damn it there's secondary available right like the you know deals we've been seen get done or we've done there's a lot of secondary so like there's money out there salking around that are not in the public markets that are very happy to do secondary deals and so if that exists guys that kind of solves the problem relieves the pressure from the from your employees or your investors and then it also still gets money into your company like that's an

42:49easy answer right so like why go public until you really need that Network I just really want to deny private Market investors their fees Eric that's really what my just two and 20 I can't I can't suffer it e trade's a lot more efficient but that's totally true two and 20 is a a hefty chunk I'm not not going to deny that yeah well I it's an interesting time we'll see I it's going to be one of two like one we're just in like a pretty heavy Market depression on companies going public and it will return to a healthier like more accessible Final Destination for companies but I do worry

43:20about like the broader macroeconomic impacts of the fact that only High net worth individuals and you know the folks that manage their money are the ones who are able to invest in like small cap companies because that's where the most growth is right uh which I think will have like negative implications for you know wealth inequality and things like this I mean maybe it's not substantial but I think it is a loss I think the world we had in in some of the 2010s and you know going back to even like the the 2000s where you know going public was just a thing you did once you had some

43:48amount of scale and some am modum of predictability is it's gone but I think too though probably as you were saying it's it's a very rare situation even find yourself considering that I think a lot more Founders if you know coming to an exit is something that you're interested in I think there's much more there's much easier paths than than aiming to public with much less work frankly so well and that's what you covered in the report I mean there's a whole slide on other good outcomes for CSS businesses I did want to actually talk through some of those so other than striving for AP IPO what are some of the

44:22outcomes you're seeing your clients look toward as great outcomes for theirs businesses we I think we've covered the why IPOs are positive negatives but I mean the cool thing about CSS is there's a lot of people that want to own great CSS businesses and so you know we sold a business called neutr Che to a Content company called immediate media and so they were able to effectively say hey we want we have an ad driven model with tons of Maus people looking at our content we need a subscription offering for that right and so that was a home run deal so it was a subscription business selling to a Content business

44:53and you put those two together and that just solves a lot of cat questions you know private Equity actively looking at the space right so they're actively looking at Great businesses that are cash flowing just like they would you know a car wash business they like growth businesses that have that have nice predictable revenue streams CSS is literally the definition of that and then you know there's there's founder own businesses we've seing lots of people just be like hey I'm good to go and they'll sit there and they collect their dividend and it's it's a phenomenal outcome for them and that that is not a bad thing and then one

45:21area we're really excited about is these CSS aggregators we kind of talked about this a while back but there's a ton there's like five million businesses in the App Store that are generating money right that's a lot of companies and most are small you know there's very few that are to Jacob's Point are like north of 500 million of Revenue that's really rare but there are a bunch that are doing five 10 15 million in Revenue profitably I bet a lot of Revenue cat customers and so what we start to see are the CSS aggregators and there's a bunch we'll name a bunch in our report I

45:51won't do it here that are buying these companies up for multiples zida they're giving Founders liquidity they're taking over the app sometimes they bring the team sometimes they don't it kind of depends on the on the buyer and these are great sources of liquidity for Founders and so we're seeing these guys really scaled they're railing raising institutional capital and like we're kind of sitting there like the birkshire halfway of the App Store is they're going through they're buying these things on they're valued fairly but they're not getting Revenue multiples right these guys buy off ebaa multiples so if you're generating ebaa and you're saying hey I'm just done I want to go

46:21off and do something else I think I can get 2030 million in my pocket or I can go raise a VC round and then I have to sell for 100 million that's a pretty good option as a Founder to think about and so we're seeing that happen quite a bit right now so like Benning spoons for example bought Evernote really good example they what we transfer as well there's and there's a bunch of these coming in Europe specifically and then a few here in the US is there a theory the case like why they're more common in Europe than here might just be that bending spoons is in Europe could be

46:48part of it sure bending spoons is definitely in Europe and they're the ones doing the most of it it seems like they're they're great yeah they're really smart operators but I think there's a couple things one there's a little more affordable technical Talent over in Europe if you're not going to bring a team right someone's running the business for you right yeah so just like high profit margin businesses like two businesses with equal every everything else equal is going to have a higher margin in in like a lower cost of living Place yeah right if you can still capture do the marketing right correctly still capture us consumers right so I

47:16think they're seen we've seen stuff like that really scale but also some of the talent over there it's just phenomenal and they really understand marketing they know the best of breed practices right they're implementing AI left and right and so they they've been able to scale businesses that like some names that we haven't heard of you're in the the tech crunch world if you will that are used by hundreds of millions of people around the globe they just don't happen to sit in Silicon Valley or Austin they don't get the Press but they're big big businesses I think it's also worth pointing out that like exits

47:43are only needed if you need an exit like I think it's good if you do want an exit and then you need to know these things and you should plan accordingly and I think there are some choices you can make strategically as a business owner to like plan for that and to give yourself optionality but I also say like if you don't see yourself needing a lot of liquidity in the short term and like you're in if we the Long Haul then you go back to the original algorithm Eric was saying just focus on your business keep your head down and because the Market's going to

48:12look complet like if you're not going to sell for 10 years or 15 years or 20 years the Market's going to be completely in a different shape and a lot of this advice might be moot the only thing that will probably stand the test of time is good businesses that build good products that do it efficiently right that that will always be true yeah and that's that the last one we just said keep a cash cap like I know lots of Founders in San Francisco around the globe that have like a nice business kicking out three four million of eido to them Tak some nice dividends

48:38and they're happy like you know it's a great life like so you don't need the tech crunch article you don't need to call me right to sell your business for $50 million I'm a phenomenal outcome situation so I think that's becoming more and more common to people and and like we give that advice all the time like hey like we don't think this is going to sell for 50 million so sit there hold on it like buy a nice second house live a good life all right the last thing I did want to talk as we wrap up is you have this slide called Maslow's hierarchy of subscription and I

49:08thought this was a fun place kind of an optimistic place to kind of end the the episode here what do you mean by that and then where do you see the opportunities so I think a lot of people are familiar with maslov's hierarchy of needs and this is a you know a psychology term effectively word just kind of describes like how to Consumers Focus their life and their goal how they Orient their lives and it's so starting from the bottom up and I you know there's no illustration here but you kind of focus on Food Water Shelter first right and Basics just to stay alive and you go safety right are you

49:37kind of happy healthy right as your family happy and healthy but then it starts to get a little more esoteric a little more like personal self-fulfillment you've got love and belonging like do you have someone you're you're a partner are you part of a community that you really feel part of then you have a steam like do you feel really good about who you are right like you personally are you happy with your health your looks your Fitness and then you have self-actualization which is I want to be better than I am today so I'm doing something to improve myself right and so we talked about this last year

50:06that that if you're building a great CSS business tying it to passion is a great way to enhance retention and passion ties to Identity right so if you think about this if I say yeah I'm a Strava user well what do you think what are this what does that person think well they're probably an athlete they probably care about Fitness right so it's it's an identity if you're Surfline user you're a surfer right that's just who you are you know it's who you identify as if you use team sta you're probably a passionate coach of use Sports maybe your your kid son daughter play soccer somewhere and you're like

50:38that's who I am I like to I like to use team stamp if you're Onyx you're Hunter right that's just who you are you're an Outdoorsman you're rough you're rugged like that's just who you are and so we've we kind of took the pyramid and we laid out different CSS businesses that are building for those different needs and the way we'd encourage Founders to think about that is is which and this is a little esoteric but it's like which need are you targeting right if you're going to do love and belonging well man you should have a community function built into your out absolutely right if

51:04you're doing Este steem some sort of leaderboard is a great way for people to feel esteem by knowing where they are in that leaderboard self-actualization you need to constantly putting new content in so people can get better and better whatever they're trying to do like you know it's a yoga app right or mental health right there needs to be new content so they get better and better the yoga practice so yeah we think there's a lot to think through here it's a New Concept for us a new framework we're trying out but we always like to just think about not just stocks and graphs like looking backwards we want to

51:31look forwards right and see like how do you how do you think about building a new company or reaing an existing company towards where Market is or going to be yeah the graph is really fun too so we'll we'll provide a link to the full report in the show notes so if if you haven't already downloaded the report and weren't following along you should definitely go check out this one graph in particular I mean there's so much great content so they should definitely download it either way but I love the way you you kind of sketch those out and like at the very top you know with the self-actualization are

51:59things like reflectly like an AI powered journal and audible you know listening to audiobooks and learning and calm you know working on your your mental space yeah it's a fantastic chart and a great exercise for folks to kind of plot themsel on that chart and if you don't find a spot to plot yourself on that chart look look for the opening in the chart where you should be aiming to fit on that chart so I thought it was really good another note that you put in there that I just hadn't thought of and and I feel like every report there's like one or two lines that just kind of blow my

52:32mind and you said in there consumer spend accounts for 70% of the US GDP and of course a lot of that's going to mortgage and car payments like the base needs of food Transportation housing that those kind of things but when you think about and and as we talked about last report there's just a lot of money being spent on a lot of different areas you know onx which you just mentioned you know people are spending tens of thousands of dollars a year as a hunter these like passions these self-actualization the love and belonging the community there's a lot of money going toward these and and

53:09consumer subscription businesses building great products have an opportunity to enter those markets and capture so much more of that spend than is currently captured in the existing products and that that excites me about kind of where we're had headed as an industry yeah I think a lot of value that used to be analog is being captured digitally or those analog or physical services are now being provided with digital subscriptions attached to them and so we think that's a really exciting trend for us right you're seeing this at healthcare for sure you're starting to see it you know like the Amazon buying one medical right that's a medical

53:43subscription that now has a software tool driven Drive hopefully going to benefit Healthcare in the US which is a heck of a challenge but so these things that previously were offline you know health and safety for example the good one right like Life 360 citizen these are safety needs right that you w't normally think about being software subscriptions that people said like man there's a gap there in the market I'm going to build something so I know where my kids are I think we talk about like screen time right that's kind of a safety issue right like who your kid who your kids interacting with online like that's those products are

54:14being built and they're good right and so I think there's just more and more of the world as it goes digital we'll just need new Solutions within that pyramid of needs so you we think it's a it's a pretty wide opening area and finding places of value along this chart as well there's a company called bright Canary that I actually subscribed to and it's one of those things like you just wouldn't think this even necessarily could exist but I pay whatever it is six eight 10 bucks a month and don't even think about it because what it does is it actually tracks my kids YouTube watching and then Flags any concerning

54:46content and so you know as a parent I'm super concerned about what my kids are exposed to online so like to that screen time Point like as a parent paying eight bucks a month to get a summary of what my kids are watching on YouTube is like no brainer Nob brainer and so there's so many opportunities like that to like find things that people value and then build products around it and something like bright Canary they're pretty unique in the market and like that couldn't have existed a few years ago and now it's like a whole new segment that they can go after of safety for kids online

55:19yeah we're seeing I mean there's some I mean stuff like bird watching there's bird nest that have ai cameras enabled they'll tell you exactly which showed up so you could learn like which everybody's a great business man great product my mom I got my mom one this year shout out it's also an adjacent company but there's another business I love called Tractive that's in the dog collar space dog collar the most non-technological thing ever but now they've added GPS and you're like well that's cool I live in a city right do I does my dog I don't need know where my dog is it lives in my apartment it's you

55:47know a tiny little pup but now they've added leaderboard functions right so you could see how much your pug walk first every the pugs and do you want to you want to be the parent that doesn't walk their right so all of a sudden now you're starting to add more features in which once again all designed to keep your dog healthy and safe but like they've added features that encourage you to go do that and that was something that probably doesn't need to exist three or four years ago it's freaking awesome I actually bought a f callar friend of the podcast Gerald stone is I think a VP a

56:14product they're now fantastic product and then talking earlier about nrr and Market expansion I just got an ad in fi they're rolling out a hat supplement like add this to your pets dog food to keep them healthy make their coat shinier and everything like that super compelling offer you once you've got the attention with the value prop of the GPS enabled collar which is super fun too like seeing how many steps a dog has taken seeing where they land on the leaderboard like our whole family is like super into it already and they have like massive Market expansion opportunity into the Pet Market where we're spending you know $200 a month on

56:52our dang dog David it's not you're not spend $200 a month and your and your dangard you're spending $200 on a family member true yes of course yeah but that it's probably your cheapest family member if we want to start breaking out family members by line items David it's probably one of your cheaper it is by far the cheapest family member and I and I love him to death he's so sweet but when I see the bills come in and I'm a bit of a type they used to not cost that much they used to not cost that much lifestyle creep you know for sure but

57:22anyways that was a great place to end I think there's you know saturated as a Market feels like there's just so much opportunity still opportunity for existing businesses to grow and find new layers of product Market fit opportunities to expand their nrr opportunities to grow into other markets like there there's so much opportunity still in this space and and even opportunity for brand new businesses started in 2024 to become those IPO candidates in a few years so really really fun place to be playing in and really fun place to be working in and really fun to talk to you about all of this today we love what we do every day

57:58we get to beat these awesome businesses set yeah thanks for having me again guys it's always a pleasure yeah awesome so we're going to link to your LinkedIn and the the report and the GP bullhound website anything else you want to share as we're wrapping up no like the best thing we love to talk like just reach out like I'll be at the revenue C Conference in San Francisco on the 26th so if you're there say hi but also just Reach Out email me eric. gp.com even if you're not looking to sell like that's okay we don't need to talk to you for that we host cssc dinners we love just

58:27getting operators together to sit and talk and like decide where the opportunities are where we should build so you all need to help Eric's deal flow is what he's trying to say because like these pipelines don't build themselves baby I think we're doing we're doing pretty well I think we're pretty happy with the reputation we have and and we get a lot of a lot of great companies that love to talk I joke a little but like I think it's you might not ever engage with anybody for a transaction it's helpful to know people who can pin see where you're at if you're ever thinking about maybe doing it someday

58:57and then if you do ever want to work through a transaction with somebody it's helped to have known them for more than like the life of the transaction so no we'll turn out people all the time if they just kind of call us out of the blue we'd like to know you for two or three years like know what your goals are what's your objectives like where the weaknesses are where the strengths like spend time to know any adviser regard like lawyer accountant like so they actually can truly help you like don't just call them up and say like hey you want to do something like this is an

59:23important moment for your company like take the time all right well so much fun chatting Eric and uh we'll see you in San Francisco next week and see you on the podcast again next year for the 2025 report number six seven something like that I'd be honored to be considered 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. sub club.com to join our private community the