Where Subscriber Lifetimes Outlive Funds
Hidden Opportunities in "Software-Driven Systems"
As an investor, I don’t know if I love anything more than backing a new set of physical products or experiences that integrate a subscription model to deliver value for consumers.
I gravitate towards businesses that broadly fall into two buckets: (1) the creation of a new market (eg. PlayStation Plus) or (2) the application of a new business model to improve an old market or service (e.g. Alarm.com, or Dadi):
While I am lucky to be a Board Member or institutional investor in many of these, I got involved because I deeply believe these businesses have some of the most compelling unit economics I've seen in my career. AND YET, they were underappreciated and ignored by investors for the majority of their early-stage lives, and, in some cases, through their IPOs!
But it is not often you see implied subscriber lifetimes outlast a fund’s life. When I do, I lean into it.
As a point of comparison, consider the overwhelming majority of mobile consumer subscription apps alongside the group above. Many a la carte applications have raised hundreds of millions in preference (individually!), but often these businesses have significantly worse fundamentals (e.g. churn, pricing power) and do not achieve enduring success.
The thread that ties the companies above together is that their subscriber base is centered around hardware or a physical experience. Importantly though, these are not businesses which simply slap a subscription on top of an existing offering (which we see a lot of in this market), but intentionally designed products that integrate software to create value across high frequency interactions or emotionally sensitive purchasing decisions.
And while investors have had an aversion to hardware-centric subscription models, it's clear that not only can the retention dynamics be better than many segments of pure-play consumer apps, but so can the moats, purchase psychology, and long term FCF yield.
Many VCs don't believe it and some are even skeptical after I walk them through the numbers like the above. I welcome that. As Fred Wilson likes to say, this is how new funds outperform — avoid "me too" investing.
Lastly, I share this as an example of why I believe it is critically important for emerging investors to develop a nuanced thesis - ideally one refined through experience, and overlooked by the market. This is the only way I've found it’s possible to (a) gain the domain expertise needed for a sustainable investment advantage, (b) cultivate the open-mindedness required to see opportunity others won't and (c) have conviction where others don’t.
When I look to the coming year, I am particularly interested in finding software driven systems within health & wellness, gaming and sustainability. I strongly believe the best businesses in these spaces will not be standalone mobile applications, but rather full-stack systems often with a physical or experiential component. I welcome the skeptics, just as we did in financing Dadi, Peloton and Latch, from Series A through IPO.
Founders who are building in this full-stack approach benefit from working with an investor who has walked the factory floors in Taiwan, knows complementary go-to-market channels, and has the product sensibilities in both hardware and software to drive increasing value for the customer each month.
Ultimately, customers are the voting machine, and they speak with retention. And as the data above suggests, an elegant “software-driven system” may be the best approach.
If that resonates with you, get in touch on Twitter.
Special thanks to @Joanne Schneider DeMeireles @Brett Bivens @Ian D’Silva @Nikhil Basu Trivedi and @Eric Crowley for helping crystalize my thoughts, the entrepreneurs I’m so fortunate to work with, and my partners over the years who enabled me to find my game and take smart risks in the businesses above.