Venture Scenes | Take 2
My blog about Startups, Venture Capital, and Movies.
The Script
One of the trends that have fascinated me in recent years is the rise of podcasts as a new type of audio media. Podcasts have ingrained themselves into pop culture, and their utility runs the gamut from entertainment to e-learning. I have no doubt that podcast production will continue its rapid expansion, and on a personal note, I try to listen to at least one hour of podcast content per day (this, this, this, or this).
While I am clearly a fan of the product, I wanted to better understand the Podcast Market’s potential to support Venture Capital funding. Yes, it is a growing market, and it has exploded in popularity since the mid-2010s. There are numerous trends and long-term growth levers that could absolutely accelerate in the coming years, adding fuel to the already impressively expanding TAM.
But, the current size of the Podcast market surprised me when I began to dig deeper. Additionally, there are also some potential red herrings amid the podcast early-stage startup scene, which Venture Capitalists should be aware of, in my opinion.
The State and Size of the Podcast Market Today
While the medium has achieved impressive growth in the past few years, podcasts have still not come close to taking a sizable chunk out of the other forms of media. In fact, listenership has doubled from 2014 to 2019, as shown by the chart below:
An interesting dichotomy to think about that certainly surprised me: 1/3 of the US population listens to podcasts, but traditional broadcast radio still reaches 90% of US consumers in any given week. To me, this represents a massive opportunity to continue to take share from traditional radio.
That said, the hockey-stick growth is hard to deny for podcasts, and as listeners have grown, the ad dollars have followed. While the podcast advertising market still certainly dwarfs that of other forms of media, the growth of that market is what matters and what VC investors must ultimately weigh when assessing an investment in this space.
Concerning the US podcasting ad market’s current size, BofA and PWC had it at around ~$700mn in 2019. PWC currently projects it will have grown ~15% in 2020, which puts US Podcasting Ad revenues in the $800mn range for 2020. PWC originally forecasted that ad revenue for podcasts would grow by 30% in 2020. COVID-19 has hit podcasting ad revenue hard, like most types of media ad revenue.
PWC estimates (post-covid) that US podcasting ad revenue will grow by 55% in 2021 and 36% in 2022. This would result in a dollar value of $1.3bn and $1.7bn, respectively. It is worth noting, BofA believes the global podcasting ad market will grow at a +28.5% CAGR from 2018–2023E to a total of $3.2bn market size.
I think that most Venture Capital investors will require a TAM of at least $500mn-$1bn to consider an investment. Obviously, the larger the TAM, the better, and this is where my analysis surprised me. I expected the TAM to be much larger for Podcasts. The audio market in the United States is currently $18bn, while the streaming and physical sales markets are $16bn. Globally, PWC estimates that the TAM for podcasters is roughly $75bn, which incorporates markets like Music Performance Rights, and Radio. Podcast advertising revenue still only makes up a small slice of this pie, as shown below.
The underlying concern I have with investing in the Podcast Market is that an early-stage startup will have to ultimately capture a large enough share of that $1.7bn US TAM to warrant an investment. You have to have an extremely high level of conviction that the company you are backing will be THE market leader, especially if you are hoping to attain Venture-sized returns on your investment (let’s say greater than 10.0x). As it currently stands, there is not enough room in this market for multiple “winners” (i.e., Uber and Lyft). Also, keep in mind that it is pretty rare for any company to attain more than 20% of a particular market. Most firms attain closer to 1–3%. This presents the first serious risk of investing in a startup in the Podcasting market. Right now, the percentage of the pie that an early-stage startup is trying to capture is on the smaller side.
With that said, I still believe this industry is ripe for VC dollars because I think it is going to continue to rapidly grow. If you can enter the investment at a reasonable valuation (under $8mn pre-money at the Seed stage, for example), you can justify the smaller TAM.
Current Early-Stage Investments in Podcasting
Using Pitchbook, I estimate there are over 150 pre-series A podcast-related startups around the world. YTD, there have been 42 podcast startups that have received pre-seed and seed financing. I believe there are several attractive early-stage investment opportunities in the podcasting space, and the areas I have the highest conviction include:
- Startups that can help support Enterprise Podcasts
- Startups looking to solve the massive problem of monetization in the podcasting business
Enterprise Podcasts
One particular area of podcasting that I believe will see tremendous growth is Enterprise Podcasts. Essentially, corporations have started podcasting, in an attempt to recruit new talent, market their existing talent, and establish themselves as thought leaders. According to research done by Deloitte, 17 of the 25 largest fortune 500 companies now have podcasts. The utility of these podcasts, in my opinion, is tremendous.
For job-candidates, podcasts represent a treasure trove of information about the firm’s history, culture, mission statement, and operating strategy. Beyond that, podcasts allow listeners access to some of the great thought leaders from industries across the spectrum. Historically, this type of access and information was only available to those who had some kind of proprietary access to the thought leader (either through a working or personal relationship).
Browsing Spotify, you can understand the sheer breadth of choice when it comes to Enterprise Podcasts. Industries such as Retail, Healthcare, Telecom, Financial Services, Automotive, Technology, Manufacturing, and Professional Services are represented in the Enterprise Podcasting universe. According to Deloitte, these companies typically spend around $1.6tn in marketing per year, and an additional $200bn in recruiting. I think enterprises will continue to lean into podcasts as an effective and incredibly inexpensive marketing and recruiting tool.
Startups aimed at helping these enterprises launch, produce, or manage their podcasts would be incredibly interesting to perform further due diligence. I believe there are numerous ways to monetize these kinds of services and generate recurring (and meaningful) revenue.
Maturity in the Podcasting Ad Market
Currently, podcasts have a problem monetizing their audience. The issue arises from the very technology that allowed the democratization and growth of podcast publishing in the first place. A recent article at Crunchbase summed up the situation quite well and is worth reading if you want to dive deeper into this topic.
For an industry projected to exceed $1 billion in ad spend in 2021, it’s impressive that it’s built on RSS: A stable, but decades-old technology that literally means really simple syndication. Native to the technology is a one-way data flow, which democratizes the medium from a publishing perspective and makes it easy for creators to share content, but difficult for advertisers trying to measure performance and figure out where to invest ad dollars.
According to BofA, podcasts still meaningfully lag other types of media when it comes to advertisement play. Typically, a podcast ad load will represent 2–4 minutes/hr, compared to 10–14 minutes/hr for Radio and 11–15 Minutes/hr for TV. I believe this makes for a better listening experience, but it is indicative of the growth potential that still exists for the podcasting ad market.
I believe startups attempting to solve this monetization problem through advanced analytics, artificial intelligence, or perhaps through some other kind of emerging technology would be extremely attractive investment opportunities. And, if a startup aimed at solving this problem were to exceed, it would likely accelerate the growth for the overall podcasting TAM by allowing for advertising to grow uninhibited.
In fact, if the podcasting ad market can develop further, I think you will see a tidal wave of advertising spend flow into the medium. As shown below, the current industries that represent the most significant share of podcasting ad spend are Media & Entertainment and Financial Services. The fact that the all-important Retail and Automotive sector have only just begun to experiment with advertising on Podcasts is extremely encouraging. I think once the advertisement opportunities and analytics for podcasts continue to grow, these industries will adopt the medium in earnest.
The Subscription Model: A Potential Red Herring for VC Investors?
Recently, Spotify started to survey customers about the potential for a subscription podcast service, which will offer certain exclusive content and shows for a fee. As detailed in this article by the Verge, the company has not yet announced any kind of subscription service. Still, the survey clearly indicates it is a route the company is currently considering:
The survey describes at least four possible subscription podcast plans, ranging from $3 to $8 per month. The cheapest plan would include “access to exclusive interviews and episodes,” but would still include ads. The most expensive plan would include access to “high quality original content,” early access to some episodes, and no platform-inserted ads. None of these plans would include access to Spotify’s premium music subscription…there’s no guarantee that Spotify will follow through with launching any of the described services. Companies often survey customers about potential new products and may shape their plans based on the results. But the fact that Spotify is surveying users means that it’s likely considering launching some sort of subscription podcast plan, even if it doesn’t necessarily end up taking any of the exact forms described here.
Subscriptions have driven the growth of countless media products and services over the past ten years (Netflix is obviously the sterling example). At first glance, the wide-scale adoption of a subscription-based business model could make sense for the podcast industry. And startups are already trying to capitalize on the subscription business model potential.
Furthermore, VC investors may want to see the subscription model adopted to the podcast market before making massive bets, and many will try and cite China as the reason. The podcast market is actually 23x larger in China, with a TAM of roughly $7–8bn. Could this level of growth be achievable for the US podcasting market if it were to convert to a subscription business model en masse? I think there are reasons to be skeptical that this will ever occur.
First, the sheer number of currently free podcasts available will likely make it difficult to cut through the clutter with any kind of paid subscription service. The industry leaders (Joe Rogan, Barstool Sports, etc.) will likely have to lead the charge when putting their content behind a paywall. There are no indications, as of today, that this will occur.
Second, consumers are accustomed to the status quo with podcasts. It could potentially be an incredibly risky move for any new entrants to the market to start charging consumers, or for any incumbents to suddenly request payment for podcasts. While podcasts have gone mainstream, they still likely fall under “Nice to Have” versus “Must Have” under Nikhil Trivdei’s definition (more on this below).
Third, China’s podcasting market DNA is simply different from that of the United States. In China, the podcast market’s robust growth has been mostly driven by education and “self-improvement” podcasts, which is quite different from the Entertainment-focused podcasts that have primarily driven the development of podcasts in the US. Marketplace made the following analysis about why the “pay-for-knowledge” economy has had such an outsized effect on the rapid growth of podcasts in China:
In China, however, a separate government-linked research institute has found that the pay-for-knowledge economy is a multibillion-dollar industry because of a combination of factors: desire for focused information that’s useful and relevant; the need to update skills constantly in China’s competitive job market; the ease of paying on a mobile phone; and FOMO — the fear of missing out.
In China, audiences are willing to pay for podcasts because they see it as primarily an educational tool that will help them get ahead in their profession or station in life. Listeners can tune into a podcast and feel as if they are maintaining and nurturing their level of knowledge about fields such as the stock market or personal health. In China, Podcasts are used to ensure that people do not develop “knowledge gaps” in relation to their fellow citizens, students, or coworkers. In the United States, we want to listen to a former MMA fighter and stand-up comic ruminate on the value of life (JRE is the GOAT).
So, is it possible that subscription podcasts could still find success in the United States? Of course, and perhaps that will significantly increase the overall size of the podcast market in the next ten years. Maybe I am wrong to be skeptical, and we will even see a startup that will find a way to capitalize on that. But right now, it’s hard for me to find conviction that this is the path forward for podcasts. And, I think comparisons to China can actually be misleading.
Bottom Line
The podcasting market is growing quickly, and startups are popping up at a consistent clip. While some will fall under the category or “Media & Entertainment” (and thus likely exclusive to East or West coast VC’s), I think there will be an onset of podcasts in the enterprise Saas and B2B market that are attacking the market opportunity from a less sexy angle. And I think that the startups that successfully cater to the Enterprise Podcast market and solve the monetization problem in the podcasting industry will be primed for good Venture returns.
Startup Close-Up
As discussed in my last post, owning the data and the customer experience has become increasingly important in the past year for restaurants. Much has been written about the challenges that Doordash and Grubhub can create for restaurants, especially independent ones. For one, restaurants are forfeiting access to customer data which means it is incredibly hard for them to resell and upsell to those customers. The restaurants also wind up paying up to 30% in commissions and fees, and in many cases, restaurants are only making 5% gross profit on third party ordering. Finally, as an independent restaurant owner will tell you, creating an internal ordering system can be costly and incredibly challenging.
That is not to say these services do not have a place in the restaurant industry — I believe they do and I believe they offer an incredible amount of free marketing for restaurants that can live with the fees they charge. And I think that there are a lot of restaurants that have the volume to support the level of fees charged by third-party apps. It is important to remember that one day COVID will end, and once this virus is gone, third-party apps will still maintain their place in the restaurant ecosystem. I have no doubt about that.
But for those restaurants that simply cannot stomach the fees and loss of customer data moving forward, Lunchbox represents one of the leading alternative options. The company offers a Saas solution for restaurants, providing them with a “digital ordering system” that includes web, app, and kiosks ordering. The company charges restaurants 3–5% fees and allows the restaurants to own their customer data. Lunchbox also provides restaurants with an administrative dashboard that will provide customers with order management, menu building features, customer insight, location management, and branding control.
“We are the Shopify of the restaurant industry. ” -CEO Nabeel Alamgir
Lunchbox has quickly expanded in the past year, coming to market at an incredibly good time (for their business model, not for the rest of the world). According to Pitchbook, the company raised its $2.1mn seed round just before COVID hit, and just raised a $20mn Series A. The biggest challenge I see that lies ahead for the company is the competition in this space. Not only will it be going up against incumbents Doordash, Uber Eats, Postmates, etc. but also ChowNow, GoLogic, and to some extent companies like Cashdrop. There is also the Saas companies servicing specific food verticals such as Chowbus.
I intend to write a more detailed post examining the competitive landscape in this burgeoning offspring of third-party food delivery, but for now, I think it’s important to acknowledge the existence of these alternative apps. They are growing like wildfire and I think ultimately it will be for the betterment of the restaurant industry.
Mic-Check
If there are rabid signs of customer love from the earliest stages- subscription annual gross profit being high, cohort retention being high, payback period being low, if those things are present, then the market can surprise you to the upside. That is how I like to invest at the Series A stage.
Excellent conversation here between Nikhil and Mike. Nikhil was at Shasta Venture for eight years where he invested in the likes of Canva, The Farmer’s Dog, and Tonal. Since starting his newsletter The Next Big Thing (which I highly recommend) he has quickly become a leading thought expert on the subject of consumer subscription businesses. This podcast episode essentially covers his three pieces on that subject matter. It provides listeners with a great insight into how his mind evaluates any potential VC investment that uses subscription as a revenue model.
Of the three pieces, my favorite is his post that outlines the 10 factors he uses to analyze consumer subscription businesses. My sense is that many VC’s love when they see “Subscription ” or “Freemium” as the revenue model for a startup. VC’s appreciate the recurring nature of the revenue and the more accurate forecasts that can result from that sense of stability. But one could argue we may have hit Peak Subscriptions — an inflection point where many consumers have exacerbated the number of subscriptions they can or willing to pay for in a given month. The success and growth of Truebill to date might be evidence alone for that thesis.
So, while subscriptions absolutely have advantages and represent a business model that can de-risk the cash flow problem for many early-stage businesses, the viability of the model still has to be vetted. All of Nikhil’s points are valid, but personally, I think the most critical factors are Must Have vs. Nice To Have, Existing Recurring Behavior vs. New Recurring Behavior, and Cohort Retention.
Let’s use a personal favorite startup of mine, Bottlecode, as a small exercise. Bottlecode is currently offering a subscription service for men’s skin care products. The company provides moisturizers, toners, cleansers, and other skincare products on a subscription basis so that customers can receive their product regularly (they also offer an “as-needed” option).
The startup uses an algorithm that inputs 13 unique data points about someone’s skin and creates a personal skincare regiment and product stack. The company employs dermatologists to augment the algorithm’s development and ultimately ships the products to its customers, along with instructions. For most men, trying to find the right skin care products online can be a nightmarish experience. As the founder Drishay Menon has noted, searching for men’s skincare on Amazon can result in 10,000 different products, and most guys have absolutely no idea what they are looking for.
In the interest of table-setting, the men’s skincare market is exploding. It is projected to hit $166bn in TAM by 2022. I believe this growth is partially due to the fact that there has been a destigmatization of men using skincare routines. It is slowly becoming normalized to take care of your skin in order to live healthily. And, it can help you avoid skin complications later in life. Also, there are roughly 50 million people in the US living with acne at any time, and acne in adults occurs at an increasing rate. Bottlecode, for many of these men, will become a necessity. As Nikhil describes:
Necessities such as food, housing, health, and communication are easier categories in which to build “must have” subscription
I believe once a male makes the decision to treat his acne (due to either a prescriptive or proactive mindset), Bottlecode will become a “must have” service. To quote one of the company’s customers, “if Bottlecode disappeared tomorrow, it would be a huge pain in my ass.”
Skincare is a daily routine, requiring application at night and in the morning. As anyone accustomed to the practice will tell you, it is essential to maintain that routine. Otherwise, the effects will wear off. Similar to other types of medicine, skincare is a practice that must be adhered to for it to be worth the subscription in the first place. In that sense, I believe skincare falls under the definition of “existing recurring behavior.”
Combine factors 1 and 2 , and you have a simple recipe for a great consumer subscription business: a must have service tapping into an existing recurring behavior.
Finally, Bottlecode is already seeing excellent cohort retention, which is the metric that Nikhil has stated he cares about the most. According to Lenny Rachitsky, who Nikhil cites in his post, a good user retention rate at 6 months is above 50%. At the time of Bottlecode’s Techstar Chicago Demo Day, customer retention rate was sitting at around 45%. While it falls a bit short of the bar set by Nikhil and Lenny, Drishnay believes the industry average customer retention rate that they should be compared to is closer to 19%. Therefore, Bottlecode is nearly doubling the industry average in terms of customer retention.
I think Bottlecode is a Chicago startup to keep a close eye on. I believe that a Venture Capital firm with a consumer focus will see the broad and expanding market opportunity in men’s skincare. And I think Bottlecode checks many boxes of Nikhil’s 10 factors, making it my choice for a horse to bet on in that particular market.
Movie Rec
Sinister characters converge around a young man devoted to protecting those he loves in a postwar backwoods town teeming with corruption and brutality.
Emphasis on the brutality.
Your mileage may vary with this one. As an immediate disclaimer, and I apologize if this is a bonafide spoiler (although it happens in the first 10–15 minutes of the movie so I don’t feel too bad), a dog dies in this movie. It is heart-wrenching and I had to essentially fast-forward through that part. I know some people won’t even consider watching a movie if there is a death of a dog in it, so you have been warned.
But it mattered. Every action has a consequence in this story, every sin takes its pound of flesh, and every act of justice feels earned. The story is a slow crawl (again, your mileage may vary), but it is deliberate and incredibly well told. This is an unflinching look at a descent into darkness, told from the viewpoint of Tom Holland’s character as he tries to make his way through his Appalachian upbringing with the devil seemingly all around him, hungering for his soul.
I thought the acting was top-notch across the board, and only provided fuel to the growing fire that Robert Pattinson may very well be a world-class actor. Tom Holland steals the show though, anchoring the movie with such heartbreak, terror, and ultimately courage that we truly are seeing the world through his eyes. It’s a credit to the writing that it comes through so vividly.
I tend to overlook the flaws in movies if they are able to nail a sense of time and place. And this movie does have its fair share of flaws. The plot at times can be unwieldy, bursting at the seams of the confines of its two hours and forty minutes run time. There are side characters and subplots that warrant their own miniseries, let alone their own films. And there are one or two characters who simply get shortchanged in the development department. But, for better or worse, you truly feel as if you could walk through these towns and feel the mud under your boots and smell the moonshine in the air.
This was a hard movie at times to get through — but I am very happy that I did.
