Professional Documents
Culture Documents
Consumer
Subscription
Software
Insights
Important disclosures appear at the back of this report
GP Bullhound LLP is authorized and regulated by the Financial Conduct Authority
GP Bullhound Inc is a member of FINRA 1
Agenda
Confidential
2
Section 1
Confidential
3
GP Bullhound’s consumer subscription software practice
GP Bullhound is a leading technology advisory and investment firm, providing transaction advice and capital to category leaders with a robust
focus on Enterprise & Consumer Software globally.
We publish this Consumer Subscription Software (“CSS”) market report to provide qualitative insights into company business models, technology
and customer trends. In this report, we also feature several of the leading CSS companies & CEOs across interesting sub-sectors as well as detail
interesting trends in the sector.
Our research and report focus on software business models and content and do not include physical products or goods due to different margin
and cash flow profiles.
GP Bullhound continues to be a leader in the CSS sector from both an advisory and an investment perspective:
Current Current
Client Client
Current Current
Client Cient
Confidential
4
2020 consumer subscription software perspectives
The impact of COVID and the subsequent global lockdown has allowed CSS businesses to Mental wellness apps
flourish as consumers look for new ways to access content and services sessions up 66% y-o-y in May
Vooks, a digital reading tool to encourage children to read, has seen tremendous growth as parents look for
ways to entertain and educate their children at home. User growth accelerated from January levels and the
company now has over 1 million teachers on the platform.
Mental wellness apps saw an explosion of growth, according to Apptopia, as COVID caused stress while also
restricting access to in-person therapy.
With gyms closed, consumers quickly reached for new workout routines. Digital workout apps like Fiton saw
paying users climb to over 100k, while demand for Peloton’s workout app and accompanying bike led to the
stock doubling from February 2020.
Education subscription services are rapidly gaining traction to improve the student experience
Given the impact of COVID on in-person learning and classroom education, digital tools are flourishing after years
of being an after thought for the majority of US schools.
Monetization has remained a challenge given school budgets and IT restrictions (blocking YouTube).
Recent deals have shown how CSS business models are breaking through that barrier, by selling to parents or IPO
students directly:
Capital Raised: $30m EV: $100m
‒ Chegg acquired Mathway, a math learning subscription tool, for $100m+ or 9x 2019 revenue Deal Date: 5/2020 Deal Date: 6/2020
‒ Quizlet raised $30m from General Atlantic at a $1bn valuation
Confidential
Source: CapitalIQ, Pitchbook, GP Insights
5
INVESTORS REVIEW EACH CSS OPPORTUNITY WITH A FOCUS ON THESE KEY ATTRIBUTES
Recurring
Churn of consumer subscriptions
will be higher than traditional Revenue Intuitive UI paired with high quality
content
enterprise SaaS models Design and UX is crucial to
LTV/CAC is a KPI to watch convincing the consumer of a
Churn / Premium
premium product
Retention Content Verticals are expanding as
consumers become increasingly
comfortable paying for apps
CSS
Monopoly in a small market Flywheel User data is retained and
can be lucrative Result of strong utilized within the app
Large TAM apps needs to Niche User Base performance Proprietary Network effects from existing
prove differentiation and vs. Large TAM in all the attributes Data user base, reinforcing
moats (e.g. Fitness Apps) proprietary content and/or
monetized data
Confidential
6
Public investors’ excitement for CSS continues to grow
GP Bullhound has created the first consumer subscription software index to track how public CSS investments are valued
The inaugural index includes Spotify, Match / IAC, Chegg, Intuit, Sirius XM, Shutterstock, Peloton, Gluu mobile, Netflix and DropBox. We expect to
add additional companies to the index over the next 12 months (Bumble, etc).
A few notes:
− Two companies were added in early 2018 – Dropbox (March 2018), which debuted at 10.4x TEV / LTM Revenue, and Spotify (April 2018), which
debuted at 5.4x
− Netflix raised membership fees from $9.99 to $10.99 in Oct 2017, but still saw record-high subscribed users, beating Q4 2017 analyst estimates
and boosting its share price
Source: Capital IQ, Pitchbook, company filings and publicly available data
Note: Given the large market caps and high valuations of some of the businesses, the average of the EV / Rev multiples
Confidential
were used 7
Free+advertising vs. paid subscription – the ultimate test
Historically, investors have been conditioned to believe that consumers will always prefer a
free option supported by ads vs. paying
Paid vs. free
That was true in the early ages of the internet, but consumers are waking up to the pitfalls of ‘free’, including
content battles
intrusive ads, the sale of personal data and poor product quality.
Pandora vs. Spotify is a great example of consumers preferring to pay for quality. Both started as free apps,
using ads to generate revenue.
However, that is where the story diverged. Spotify focused on the user experience and added features such vs.
as downloading songs and playing music offline behind a subscription paywall.
Consequently, Spotify’s amount of paid users quickly accelerated and revenue surged. Meanwhile, Pandora
focused only on ads, was late to the subscription game and was ultimately sold off to Sirius.
108
vs.
96 $10,855
71 vs.
$7,591
48 $5,858
Spotify Paid
Subscription
vs.
$4,556
launched 28
15 $3,288
8
$2,156 6 7 7 6
$995
$1,409 $1,164
4
$1,385 $1,467 $1,517 $1,607 $1,600 vs.
$921
$425 $573 $655
Confidential
Source: Capital IQ, Pitchbook, 2020 estimates from CapIQ 8
The importance of the paywall
Success in the CSS space is heavily dependent on the placement of the paywall within the customer’s experience
Gaining users through a ‘freemium’ offering is critical to encouraging people to try a product; however, to effectively monetize them, they need to
be converted into paying customers.
That means correctly placing the paywall at the correct point to provide the maximum value to paying subscribers but enough functionality to
explore the service before paying.
Goals Goals
Confidential
9
Overcoming churn to build the ‘Cohort Revenue Layer Cake’
As entrepreneurs build out their companies, they can typically invest in growth marketing or product innovation to drive retention.
Which one should garner the larger share of the investment dollars?
CHEETAH Thoroughbred
Growth: Adding 10k users a month leveraging targeted marketing through
Growth: Adding 30k users a month with celebrity promoters and heavy partnerships with limited social media marketing
Instagram presence
Users are leveraging the data to manage their personal health information
Usage: Limited customization of the service and a priority on notifications to and have synched its data input into their fitness tracker
consume content
Cohort Churn: Retains 68% of customers by month 6 and 50+% by month 12
Cohort Churn: Retains 40% of customers by month 6 and only 10% by month 12 (effectively having the cohort become flat)
Throughbred
Cheetah
New user
200,000
200,000
by month 6
180,000
160,000
160,000
120,000
47k users by
120,000
month 6
100,000
100,000
80,000
80,000
60,000
60,000
40,000
40,000
20,000
20,000
0
0
Cohort 1/1/2020 2/29/2020 3/31/2020 4/30/2020 5/31/2020 6/30/2020 7/31/2020 8/31/2020 9/30/2020 10/31/2020 11/30/2020 12/31/2020 1/31/2021 2/28/2021 3/31/2021 4/30/2021 5/31/2021 6/30/2021
Cohort 1/1/2020 2/29/2020 3/31/2020 4/30/2020 5/31/2020 6/30/2020 7/31/2020 8/31/2020 9/30/2020 10/31/2020 11/30/2020 12/31/2020 1/31/2021 2/28/2021 3/31/2021 4/30/2021 5/31/2021 6/30/2021
7/31/2021 8/31/2021 9/30/2021 10/31/2021 11/30/2021 12/31/2021 1/31/2022 2/28/2022 3/31/2022 4/30/2022 5/31/2022 6/30/2022 7/31/2022 8/31/2022 9/30/2022 10/31/2022 11/30/2022 12/31/2022
7/31/2021 8/31/2021 9/30/2021 10/31/2021 11/30/2021 12/31/2021 1/31/2022 2/28/2022 3/31/2022 4/30/2022 5/31/2022 6/30/2022 7/31/2022 8/31/2022 9/30/2022 10/31/2022 11/30/2022 12/31/2022
Entertainment
Fitness / Outdoors
Others
Health / Mindfulness FLighty
(Travel, Religion, etc.) Daily Bible
Confidential
11
Usage frequency / value received vs. pricing matrix
High $160
$144 $140
$100
$100
$100 $100
$99
$90 $96
$80 $80
$70
$60
$60 $60
$47
$45
$36
$40
$30 $24
Low $10
270m US
Smartphones
by 2022
3.5bn Global
Smartphones
by 2022 (2) Proliferation of
consumer subscription
models in daily life
Confidential
14
WHILE THE METRICS MEASURED MAY BE SIMILAR, CSS BUSINESSES WILL HAVE A DIFFERENT DEFINITION OF SUCCESS
Churn Higher
Source: CSS vs. Enterprise SaaS Framework developed in conjunction with Nicolas Wittenborn, who has written about the
Confidential
CSS market on Medium 15
CSS investor benchmarking criteria
CSS investors will evaluate each business based on its own unique attributes as well as sub-industry nuances, but there are industry
standard metrics that help investors differentiate good businesses from great businesses
Confidential
16
KEY CSS METRICS
Investors will look closely at users – including the free users, active users (MAU’s) and most importantly the paid users
Top-line Growth Metrics – CSS top-line revenue can be measured in several ways:
User Growth & Bookings – Cash Bookings: Amounts received each month in upfront subscription payments
MRR / ARR – Monthly Recurring Revenues (MRR), Annual Recurring Revenue (ARR), and GAAP revenue
Important to show continued efficient growth in top-line metrics
Customer Lifetime Value = Number of months or years the average customer stays with the company multiplied by the ARPU times the
gross profit margin %.
CSS businesses have the unique attribute in that they typically have high churn after the first pay period or trial period ends. Companies
typically see churn of first time users anywhere between 20–70% of total signups.
− Consequently investors are looking for retention of users AFTER the first pay period - typically the 3rd, 6th or 12th month. High retention
in those periods, indicate that users are discovering value in the service and are likely to be retained long term, building the ‘CSS
LTV to CAC Ratio cohort layer cake’
− Great CSS businesses renew 50%+ of each annual cohort and 40% of Year 2
Customer Acquisition Cost (CAC) payback period is typically stated in months. Represents the time taken to fully pay back sales and
marketing investment to acquire a single customer
CAC Payback of <1 month is critical to counter the high churn of initial users
50%+ of users coming through organic channels is considered great
Free users: Number of users who are using the platform or business. Typicaly measured monthly or MAU’s
Free to Paid Conversion Paid users: Number of users who are paying for a subscription (typically monthly or annually)
Rates Free to Paid Conversion rate: The ratio of users who start as free users and convert to paying users. This number varies by industry and type
of business as well as how the benefits behind the paywall are structured and accessed
The type of service or content being provided can vary between CSS industries. For example, exercise apps develop fitness classes at a
high cost while a hiking app may be leveraging User Generated Content or UGC to enhance its offering.
Gross Margins Typically companies leveraging UGC have higher gross margins and a sustainable competitive advantage as their product and service is
influenced and improved by the content and data users are generating
Investors have been proven willing to pay up for CSS businesses leveraging UGC to provide a unique service
Free cash flow / Growth is of paramount importance, with excess cash being used to fuel growth
Burn rate Important, therefore, to understand the cash burn in the business and planning for capital efficient hyper-growth
Confidential
17
DEFINITIONS & CALCULATIONS
Customer Lifetime Value Amount of gross profit a customer is calculated to deliver to the ARPU ∗ GM
CLV =
(CLV) company over the lifetime of the customer Churn rate
The number of months a company requires to pay back its cost CAC
Payback period
Payback Period =
of customer acquisition ARPA ∗ GM
Confidential
18
Section 3
Confidential
19
PROVIDING THE SHOVELS AND PICKAXES TO THE CSS BUILDERS
Confidential
20
PROVIDING CRUCIAL SERVICES TO THE CSS ENTREPRENEURS
RevenueCat
Jacob Eiting 3. What does the future look like for RevenueCat?
CEO Revenue Cat recently announced a $15m Series A round
led by Index ventures and plans to grow from 17
employees to 40 employees shortly. In addition, the team
is focused on expanding the number of CSS businesses
above the 3,000 currently using the RevenueCat platform
Confidential
21
Section 4
Confidential
22
STORYBOOKS BROUGHT TO LIFE
Vooks
Confidential
23
JOURNALING TO HAPPINESS
Reflectly
Confidential
24
TRANSFORMING ONLINE INTERACTIONS THROUGH SONIC IDENTITY
Voicemod
Confidential
25
Section 5
Confidential
26
Premier CSS financial investors
GP Bullhound is in constant contact with some of the worlds leading CSS financial investors and is helping shape the investment
conversation
Kingdom Holding
Company
Threshold
Ventures
Confidential
27
VENTURE CAPITAL FOR CSS BUSINESSES
Adjacent
|Q&A WITH Nico
1. Why did you decide to focus on CSS for a fund?
Adjacent's focus is on mobile-first companies, but as 90%+ of
top grossing apps today are subscription-based, this ends up
being mostly consumer subscription software. I got there from
SaaS investing with Point Nine Cap & Insight Partners, as SaaS
has a similar high margin, recurring revenue business model.
Nico Wittenborn
2. How do you pick long-term winners in CSS?
A few things have to come together: efficient distribution
Founder (both organic and paid), a really sticky product (over
months/years, not days), some kind of defensibility (unique
content, network effects, tech, etc.) – and all of this in an
'adjacent' category (benefitting from a new macro shift).
Confidential
28
Notable subscription software M&A deals & private financings
Selected M&A and private placement transactions Selected M&A and private placement transactions
Announce Implied Announce Implied
Date Target Buyer Deal Type Category Value ($m) Enterprise Value Date Target Buyer Deal Type Category Value ($m) Enterprise Value
Aug 12, 2020 M&A Online Tools Undisclosed Undisclosed May 20, 2020 PP EdTech 100.0 900.0
Health /
Aug 11, 2020 PP Online Tools 15.0 60.0 Apr 29, 2020 PP Undisclosed Undisclosed
Mindfulness
Aug 11, 2020 M&A Online Tools Undisclosed Undisclosed April 20, 2020 M&A Entertainment Undisclosed Undisclosed
Personal
Aug 10, 2020 PP EdTech 66.0 Undisclosed Mar 6, 2020 PP 20,3 120.3
Finance
Personal
Jul 29, 2020 PP EdTech 46.6 Undisclosed Mar 5, 2020 PP 700,0 6,000,0
Finance
Personal Fitness /
Jul 24, 2020 PP 500.0 5,500.0 Mar 2, 2020 M&A Undisclosed Undisclosed
Finance Outdoors
Health /
Jul 24, 2020 Undisclosed PP 10.4 Undisclosed Mar 1, 2020 PP Dating Undisclosed Undisclosed
Mindfulness
Personal
Jul 17, 2020 PP EdTech 130.0 2,570.0 Feb 24, 2020 M&A 7,200.0 7,200.0
Finance
Jul 16, 2020 PP Entertainment 63.2 Undisclosed Feb 19, 2020 PP EdTech 50.0 2,050.0
Health /
Jul 13, 2020 M&A Entertainment 325.0 325.0 Feb 1, 2020 PP Undisclosed Undisclosed
Mindfulness
Jul 2, 2020 PP Entertainment 40.0 1,400.0 Jan 14, 2020 PP Entertainment 55.0 530.0
Personal Fitness /
Jun 29, 2020 M&A 1,000.0 1,000.0 Jan 8, 2020 PP 285.0 1,035.0
Finance Outdoors
Jun 22, 2020 PP Online Tools 60.0 5,850.0 Nov 25, 2019 M&A Online Tools Undisclosed Undisclosed
Health / Fitness /
Jun 10, 2020 PP 47.7 Undisclosed Nov 12, 2019 PP 55.0 237.4
Mindfulness Outdoors
Personal Health /
June 9, 2020 PP 33.0 Undisclosed Sep 16, 2019 M&A Undisclosed Undisclosed
Finance Mindfulness
Confidential
Source: Capital IQ, Pitchbook 29
Notable subscription software M&A deals & private financings
Selected M&A and private placement transactions Selected M&A and private placement transactions
Announce Implied Announce Implied
Date Target Buyer Deal Type Category Value ($m) Enterprise Value Date Target Buyer Deal Type Category Value ($m) Enterprise Value
Jul 31, 2019 PP Online Tools 135.0 1000.0 Jan 29, 2019 PP EdTech 30.0 Undisclosed
Personal Personal
Jun 19, 2019 PP 50.0 285.0 Jan 28, 2019 PP 105.0 860.0
Finance Finance
Health /
Jun 18, 2019 PP 3.0 Undisclosed Dec 31, 2018 M&A Dating Undisclosed Undisclosed
Mindfulness
May 30, 2019 PP Online Tools 110.0 Dec 7, 2018 PP Online Tools 11.5 61.5
505.0
Health /
May 29, 2019 PP 50.0 310.0 Oct 30, 2018 PP Entertainment 40.0 200.0
Mindfulness
Health /
May 7, 2019 PP 2.4 Undisclosed Oct 29, 2018 M&A Dating 85.0 85.0
Mindfulness
Fashion /
Apr 30, 2019 PP Online Tools 6.0 Undisclosed Oct 18, 2018 PP 59.8 Undisclosed
Clothing
Health/Mindf Fitness /
Apr 17, 2019 PP 5.2 30.0 Oct 11, 2018 M&A 85.0 80.0
ulness Outdoors
Health /
Apr 15, 2019 M&A Online Tools Undisclosed 200.0 Aug 24, 2018 PP 25.0 125.0
Mindfulness
Other /
Health /
Apr 9, 2019 PP Productivity 2.5 14.5 Aug 22, 2018 PP 350.0 1,500.0
Mindfulness
tools
RENT THE Fashion /
Mar 21, 2019 RUNWAY
PP 125.0 1,000.0 Aug 3, 2018 PP Entertainment 23.0 Undisclosed
Clothing
Fitness /
Mar 6, 2019 M&A Undisclosed Undisclosed Aug 2, 2018 PP Entertainment 179.8 1,150.0
Outdoors
Health / Personal
Feb 6, 2019 PP 88.0 1,000.0 Jul 26, 2018 Undisclosed PP 3.8 21.8
Mindfulness Finance
Personal Fitness /
Feb 4, 2019 PP 50.0 950.0 Jul 25, 2018 PP 85.0 610.0
Finance Outdoors
Feb 1, 2019 M&A Entertainment 3,874.6 3,500.0 Jun 20, 2018 PP EdTech 18.8 160.0
Confidential
Source: Capital IQ, Pitchbook 30
Section 6
Confidential
31
CONSUMER SUBSCRIPTION MARKET INSIGHTS
GP Bullhound research “Consumer Subscription Software Insights” – August 2019 GP Bullhound in the media
Alec Dafferner
Eric Crowley
Confidential
32
Report authors
Confidential
33
We partner with global tech
leaders to build the future
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ABOUT GP BULLHOUND
(1) League table data represents selected transaction advisors. Time period is 2016-Q4 2019. Global M&A transactions Confidential
between $10m and $300m 35
Our focus sectors
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VICE PRESIDENT PARTNER DIRECTOR SENIOR ADVISOR PARTNER DATA SCIENTIST
Susanna Andersson Reda Ben Larbi Adam Birnbaum Karl Blomsterwall Elena Bocharova Bev Boettcher
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Baltic Classifieds Group GP Bullhound Fund III EcoVadis GP Bullhound Fund III Innogames
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Apax Partners Spotify CVC Growth Partners Klarna Modern Times Group
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Alltrails Spotify Magix AutoTrader Hitta.se
ACQUIRED BY INVESTMENT BY ACQUIRED BY ACQUIRED BY ACQUIRED BY
Spectrum Equity GP Bullhound Fund III Capiton Naspers Sprints Capital
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