Why investors should fund dating

Published in

The Startup

10 min readJan 14, 2019

… or at least consider it 👀

I was carefully reading Andrew Chen’s article “Why investors don’t fund dating” while screening different industries including the dating business to start my own company.

I have worked over the past 6 years in strategy consulting for Arthur D. Little as a manager in the TMT practice (Telecom, Media, Technology) based in Vienna, Austria. I was also in charge of the transaction competence center globally. I have accompanied more than 30 telecom operators, media and technology companies in as many different countries, defining their strategies facing disruptive business models or performing due diligences as part of a broader transaction process.

The six reasons listed in the article why investors don’t invest in dating are:

Built-in churn
Dating is a niche and has a shelf-life
Paid acquisition channels are expensive
City-by-city expansion sucks
Hard to exit
Demographic mismatch with investors

These are religiously repeated by many investors, even the one specializing in marketplaces (my sister included). They even frowned, when I dared introducing the dating industry as a market place business.

While I believe that I don’t necessarily need to explain why it is a marketplace business, it is worth looking more into details at the 6 points of Andrew Chen’s article.

Built-in churn 🏃‍♂️

Churn is indeed one of the most important KPI, for any SaaS company or telecom operator. It can be split up into two main reasons:

Natural churn, you can’t do anything about it. A household based in NYC is moving to LA, its current internet service provider is not available in LA. Your client needs to churn. This churn is usually neutral to your NPS.
Churn is induced by other factors, you are not delivering the expected value for money to your customer. Your current TV offer is way too expensive in comparison to Netflix and the value it brings. Your client will churn. This churn will negatively impact your NPS.

Yes the previously stated churn sucks, it is in the best case neutral to your NPS, and always negative for your business.

This is where the confusion happens. For none of these companies, will the client come to you, shake your hands, say thank you for the extraordinary job you have done, and tell you that this is now time for him to leave you.

Unlike other industries, churn is a formidable asset in the dating business:

(1) It can be positive thus attract new people: a customer that will delete your dating app (because it has done its job) will talk about it and spread the word positively which increases your NPS.

(2) A high natural churn (people go on and off dating apps before settling in a long-term relationship) is a great asset for new comers. If 40% of the market you are targeting is churning every month (which is an estimated number of the actual churn for dating apps), this simply means that 40% of the market is reachable for you from day 1.
I wish you good luck and a lot of perseverance when you go and try to sell a SaaS solution to companies that usually renew their contract every 15 years.

Dating is a niche and has a shelf-life ⏱

Yes, dating has a shelf-life, nobody is single forever (or at least constantly looking🤷‍♀️), which only means that your market potential isn’t 100% of the people but only the ones who are single at a specific point in time. In the US 45% of the adult population is single, which represents more than a 100 milion people.

It is true that online dating started as a niche business. Back in the begining of this century, online dating services were creepy and closely related to sexual services. It was perceived as the last resort option to find your partner. But mentalities have evolved with the appearance of different products that have made this more acceptable. Think about the 2020's when the first waves of young adults born from couples who met online will be themselves trying to find love online.

More generally, this is even questionable if the dating market has more than two mainstream segments (18–35 and 35+) as the market capitalization of IAC (that owns Tinder among multiple other brands) would probably be in the same range as Tinder alone. A lot of small apps/websites focus on specific ethnic, religion, social groups, but their market share is so limited that they rather complement market leaders.

Dating has already been through 2 main eras, here is my take on how it will evolve:

(1) 2000’s: Inception of the online dating business. With the democratization of the internet, online dating has started by digitalizing the traditional model of the “real estate agent” with experience and professionalism. People would put their CV online and get in touch with each other, mostly attracting adults (35+).

(2) 2010’s: The supermarket of dating. When online dating was still a taboo for the younger generation, Tinder managed to democratize its utilization by introducing the gamification aspect to it. After 7 years, and a lot of similar competitors on the market, this is a whole generation that is now used to downloading a dating app when they are single.
We have asked 500 people aged between 18 and 25 years old what they thought about their experience on existing dating apps (of which Tinder had 90% of market share), words like “supermarket”, “meat”, “superfical”, “unrespectful”, “dehumanization”, “object”, “unpersonnal”, popped up the most.

(3) The years 2020’s will see this industry move into a new era. New generations are used to online dating, it is not seen as the last resort option and they don’t need anymore to hide behind the gamification aspect. This means that people will be willing to share more content (Tinder’s success was mostly driven by the simplicity of loging in with a single picture profile, that is not enough anymore). People will get to know each other online better than they could in real life. The overall experience will be more social, with less “pressure on results”.

In general all underlying macroeconomic indicators are positive (figures for France):

A constant year-on-year increase (link to the official statistic website of France) of the number of singles for the past 40 years (people marry less and later, study longer, divorce more often)
A large market is still to be addressed, according to the Xerfi study about Online Dating in France, 40% of French people have not used online dating services yet (constantly reducing figure)
Penetration of paid subscription is still to be improved as the psychological barrier to pay for these services is still significant

Paid acquisition channels are expensive 💸

If I were Andrew Chen, this is where I would have started. Yes — paid acquisition channels are still expensive, (more expensive than it used to be when Tinder was launched) but in comparison to other industries suggested by Andrew Chen, they are also almost the only incurred costs (you don’t need any content or sales team). But yes, it hurts to spend money on paid acquisition instead of content, both in your mind and in your balance sheet.

Ultimately to be successful a new comer needs to have either (both options are not mutually exclusive) a (1) truly differentiated product that can araise from the concept, the UX, the price of the service (free in the case of Facebook dating…), using a new technology or (2) a cost advantage that makes the customer acquisition radically cheaper.

(1) Users are constantly looking for a new and differentiated product: Dating app users are not known for their loyalty, which makes the so-called built-in churn a rather good news for new comers. Users are unstatisfied with those services and always looking for new options (a french consumer association study showed that 61% of users are not satisfied with existing services, worse than the french state-owned railway company in a similar study). In the US, dating app users simultaneously have in average around 4 different dating apps installed on their phone. The next big thing is somewhere out there…

(2) On the cost part, online dating has been so far only seen as a last resort option to find your better half, something not to be necessarly proud of and thus more personal and less “sharable”. Any social network effect or word of mouth has been very limited. If online dating becomes more accepted in the minds of people, social network effects might ultimately become a true differentiator as it would radically change the cost structure of an online dating business.

For the existing competition to Tinder or Match (in the case of Tinder, competitors like Happn, Bumble, Once, etc.) paid acquisition channels will become more and more expensive as their product is at the end not necessarily well differentiated (all using the same UX innovation introduced by Tinder, the famouse “swipe and match”) and users tend to end up going back to Tinder.

City-by-city expansion sucks 🏙

I have recently had the opportunity on an assignment with Arthur D. Little to review some marketplaces for a private equity fund. What stroke me at that time, looking in Europe at online e-commerce platforms, was that some local players were so strong in their own market that even Amazon could not move a needle (Allegro in Poland or eMag in Romania).

These websites have in common that they started as marketplaces, they built their network by balancing supply and demand and adjusted their offer to the local specificities (e.g. cash on delivery in Romania).

I understood at this moment that building small networks, whether at the level of a city or a country, was at the heart of any marketplace expansion strategy.

The same goes for Uber, Airbnb, Spotify, etc., even Netflix to some extent. They need their content strategy to each market.

Hard to exit ✔

There are usually three types of potential exit options (1) sell to an industry player, (2) sell to an investment fund, or (3) go public via an IPO.

(1) AIC is the main acquirer / investor in the market as they own multiple brands covering different segments. However unlike what they could be advertising about their organic and inorganic growth strategy, they are at the moment mostly trying to protect Tinder and its remarkable customer and revenue growth.
Besides AIC, there were until now no active industry players regularly investing in the business, which gave AIC a dominant position and limited liquidity to the market.
However many competitors are getting stronger and the market environment will certainly evolve within the next investment cycle, (1) Spark Networks acquired Zoosk in 2019 for an estimated $258m and became the second biggest listed competitor to AIC, (2) Badoo Inc just launched in June 2019 the “Magic Lab”, the holding entity consolidates different strong brands like Badoo and Bumble and plan to build multiple new brands with an allocated $100m fund. And finally (3) the launch of Facebook Dating on the market will certainly offer many more development opportunities for the industry, as the social network giant is rolling out its dating service in many different countries as we speak.

(2) Investment funds have doubts about the industry due to the current limited potential acquirers and thus liquidity on the market. Dating in general attracts limited amount of interest but given the evolution of the market dynamics, further inorganic moves in this field from other players than the Match Group will definitely trigger more interest.

(3) While IPOs in this industry have not been a great success besides IAC, other listed companies include the Spark Networks and The Meet Group. We have recently seen more interest in this exit strategy. Before the Spark Network’s acquisition Zoosk withdrew its IPO plans. Bumble announced its plans to pursue an IPO, but seems to have dropped this plan. The same way Facebook could offer many new opportunities, a successful IPO could definitely spark the interest of the whole ecosystem. Question mark about the exist strategy of investment funds that have supported Happn, The League or Once.

The real question is rather: what event in the coming years will open the floodgates and provide liquidity to reorganize the market and end the Match Group dominant position? This is where early investors will make a difference.

Demographic mismatch with investors 👴👦

My initial assumption as an optimist first-time founder was that investors would look at two different things: (1) the team and (2) the traction of your product.

In reality this is much more complex in a consumer context where you need to have some people believing in your product at the very begining of the adventure (which is even more difficult when you are a first-time founder).

And there is in fact a clear demographic mismatch between the old investor generation that still perceives dating as a “creepy” industry that may convey a bad image for their own investor branding.

However two key trends will change this

Investors will start to acknowledge that their kids are actually using these apps and that investing into better products that will be more respectful of people’s identity, can actually benefit the whole society (and their kids)
Young investors are taking more decision roles, the same people that were studying while they saw the uptake of Tinder will be investing themselves in services they have been using

Final note 🕊

The entry of Facebook in the dating business combined with stronger competitors to the Match Group (Magic Lab, Spark Networks) will definitely offer many more development opportunities for the industry (including new potential exits).

Will Facebook introduce a complete new experience that could revolutionize the industry? Part of the answer is here and it doesn’t look like a revolution. Will Facebook have a competitive edge through their existing user base? It is certainly an asset. Offering a free dating option for the 35+ segment is definitly disruptive by itself as the regular existing dating subscription costs around 30$ per month.

The only certainty about dating is that the market still has room for growth and for the introduction of new innovative products.

I am updating this article as I am learning from my current experience in the industry