Important disclosures appear at the end of this report GP Bullhound LLP is authorised and regulated by the Financial Conduct Authority GP Bullhound Inc is a member of FINRA GP Bullhound Hong Kong Limited is authorised and regulated by the Securities & Futures Commission September 2021 Consumer Subscription Software Spinning the CSS flywheel to delight consumers GP Bullhound Global Insights 2 The view from GP Bullhound Fast-forward three years, most people will have 5-10 different CSS business subscriptions. Entrepreneurs are continuing to build better products, and consumers are seeing value in these services because they truly make life better. For many of us, the idea of paying $30 per year to improve one’s life is very appealing.” Eric Crowley, Executive Director We believe that the CSS business model enables companies to rapidly scale with attractive margins while also providing a compelling consumer value proposition. We are excited to help guide CSS companies through the next chapter of their evolution.” Alec Dafferner, Partner Table of contents Our CSS Index shows private consumer companies are set to drive lively IPO market Key CSS insights From our CSS flywheel to Western / Eastern models, here’s what you need to know Expert views from company builders What CSS leaders and investors have to say CSS metrics to watch Niche end-verticals highlight a broad landscape What investors focus on and key nuances Getting the fundamentals right Past CSS insights Current CSS ecosystem Market update A leading technology advisory and investment firm, providing transaction advisory and capital About us B C A CONSUMER SUBSCRIPTION SOFTWARE –THE VIEW3 8 16 23 29 35 40 3 About GP Bullhound’s CSS team 4 VICE PRESIDENT, RESEARCH Jennifer.Eller@gpbullhound.com Jennifer Eller GP Bullhound’s CSS team CONSUMER SUBSCRIPTION SOFTWARE GP Bullhound’s CSS team leverages decades of collective experience, proprietary intelligence, deep industry relationships, and leading data sources to identify and communicate what you need to know to stay ahead of the curve. Our CSS practice is led by our San Francisco-based Executive Director, Eric Crowley, who has 10+ years of investment banking and private equity experience. PARTNER Alec.Dafferner@gpbullhound.com Alec Dafferner EXECUTIVE DIRECTOR Eric.Crowley@gpbullhound.com Eric Crowley VICE PRESIDENT Okan.Inaltay@gpbullhound.com Okan Inaltay VICE PRESIDENT Garrett.Vaz@gpbullhound.com Garrett Vaz ASSOCIATE Daniel.Kim@gpbullhound.com Daniel Kim, CFA ASSOCIATE Gerry.Kelliher@gpbullhound.com Gerry Kelliher ANALYST Daniel.Roberts@gpbullhound.com Daniel Roberts ANALYST Adam.Segall@gpbullhound.com Adam Segall RESEARCH ANALYST Maria.Lazareva@gpbullhound.com Maria Lazareva About us Market update Past insights B C A Key insights Q&A with the CEO Q&A with investors Ecosystem Metrics Research team 5 B C A 2019 2020 First investment bank with CSS focus Consistently serving as a contributor and guide to the CSS ecosystem and entrepreneurs Deep domain expertise in consumer subscription sector CONSUMER SUBSCRIPTION SOFTWARE About us Market update B C A Key insights Q&A with the CEO Q&A with investors Ecosystem Metrics Past insights Previous CSS reports Click on the images below to read more Celebrated news articles Click on the images below to read more 6 GP Bullhound continues to lead in the CSS sector from both an advisory and an investment perspective GP Bullhound’s recent CSS activity CONSUMER SUBSCRIPTION SOFTWARE ACQUIRED BY INVESTMENT BY INVESTMENT BY Fund IV INVESTMENT BY ACQUIRED BY INVESTMENT BY Fund IV INVESTMENT BY Fund IV ACQUIRED BY INVESTMENT BY ACQUIRED BY ACQUIRED BY ACQUIRED BY INVESTMENT BY Fund III INVESTMENT BY Fund III ACQUIRED BY About us Market update B C A Key insights Q&A with the CEO Q&A with investors Ecosystem Metrics INVESTMENT BY CURRENT CLIENT INVESTMENT BY CURRENT CLIENT CURRENT CLIENT Outdoor exploration Sell Side Music Sell Side Language learning Sell Side Fund IV Fund V Past insights Fitness Sell Side CURRENT CLIENT Job search service Sell Side CURRENT CLIENT CONFIDENTIAL INVESTMENT Streaming Entertainment Provider Growth Equity Firm CSS international payments provider CURRENT CLIENT Sell Side 7 How do you stack up? CONSUMER SUBSCRIPTION SOFTWARE About us Market update B C A Key insights Q&A with the CEO Q&A with Investors Ecosystem Metrics Past insights Click here! Our passion is CSS, and core to GP Bullhound’s mission, we want to help the world understand the ecosystem’s nuances and operators CSS company owners and investors – as a part of our market research on the CSS ecosystem, we want to learn more about your business for benchmarking purposes Our online survey will take just a few moments of your time – less than 10 questions All data will be aggregated and kept anonymous We ask all participants to complete our online survey by 31 October 2021 Once we crunch the numbers, we’ll send you the results! Who? What? Where & when? We want to hear from you - take our CSS survey 8 Market update 9 Market update CONSUMER SUBSCRIPTION SOFTWARE Source: Sensor Tower, DataGrail, Edelman Trust Barometer, and GP Bullhound insights Twitter Blue Bookmark folder, ability to undo tweets, reader mode Jun-21 $4.99/month Discovery+ Streaming 55,000+ reality TV episodes Jan-21 $4.99/month Disney+ Access to ad-free streaming titles and on-demand movies at extra cost Nov-19 $7.99/month Nitro Enhanced Discord experiences such as extra emojis and bigger uploads Nov-17 $9.99/month Established consumer brands launch subscription offerings About us Market update B C A Key insights Q&A with the CEO Q&A with investors Ecosystem Metrics Past insights Multiple brands have launched subscriptions for their apps and websites to generate recurring revenue and a stickier client base 10 Market update CONSUMER SUBSCRIPTION SOFTWARE Source: Sensor Tower, DataGrail, Edelman Trust Barometer, and GP Bullhound insights Apple legal case versus Epic, and impact on App Store take rates Apple’s App Store legal cases are beginning to impact App Store take rates The courtroom battle over the App Store’s 30% take rate continues to drag on, with both sides presenting compelling arguments N a cracking Increased antitrust pressure on the US Congress, and in Asian countries and the EU, could see Apple proactively making changes to avoid court rooms CSS investors and entrepreneurs could see billions of dollars swing their way as Apple’s walled garden is showing cracks About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Our view Apple recently announced several compromises for developers, including allowing developers to notify consumers about alternative payment options (web) over email as well as allowing media apps to have an in-app link Expect entrepreneurs to quickly move to take advantage of web sign-ups or discounted renewals through the web Q&A with investors 11 Market update CONSUMER SUBSCRIPTION SOFTWARE Source: Sensor Tower, DataGrail, Edelman Trust Barometer, and GP Bullhound insights With the release of iOS 14 in September 2020, consumers are asked if apps can collect their data for tracking purposes, including the Apple IDFA. Consumers also have a dashboard to quickly review all App Store subscriptions. This change is widely expected to reduce consumer targeting efficiency and conversion rates, driving up customer acquisition costs. Our view Short-term: CSS ecosystem growth hampered by adoption of iOS 14 Long-term: This will benefit the CSS industry by forcing companies to build better products that attract customers organically ▪ Reduced marketing efficiency to force CSS businesses to focus on acquiring customers organically through clever engineering and unique value propositions ▪ Combined with the Apple Tax, iOS 14 to push businesses to drive consumers to sign up through web-interfaces, improving margins ▪ App developers are given an additional tool to acquire, retain, and win back subscribers by using an offer code for subscriptions ▪ The code can be distributed through any digital or offline method, allowing a customer to access an app for free or for a discounted subscription for a specific duration ▪ Early surveys indicate 90-95% of consumers opt out of being tracked, confirming industry fears and hurting ad efficiency across platforms like Facebook ▪ With Facebook ad personalisation and performance hindered, CSS advertisers will look for other avenues for advertising About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights iOS 14 and impact on industry growth: Short-term pain = long-term gain Q&A with investors 12 ‘Covid bump’ or paradigm shift in consumer preference? Market update CONSUMER SUBSCRIPTION SOFTWARE Source: Sensor Tower, DataGrail, Edelman Trust Barometer, and GP Bullhound insights Many CSS businesses had a fantastic 2020 as consumers converted in-person activities to digital experiences, including working out at home, exploring the outdoors, or trying a new hobby. As developed nations begin to emerge from the pandemic, many investors are asking if Covid- driven growth rates can be maintained. Last year’s subscribers have started renewing and investors are watching for early signals in renewal rates. Based on GP Bullhound’s surveys, the transition to subscription services will carry on as entrepreneurs continue to roll out valuable offerings to help consumers improve their everyday lives. About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Consumer preference Covid bump Paradigm shift Increased demand for high- quality CSS businesses Past insights Q&A with investors 13 10.6x 5.6x 5.1x 8.7x - 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 GPB CSS Index - TEV / LTM Rev Avg. GPB CSS Index - TEV / NTM Rev Avg. Our CSS Index shows growing public investor excitement CONSUMER SUBSCRIPTION SOFTWARE Source: Sensor Tower, DataGrail, Edelman Trust Barometer, and GP Bullhound insights Debuts at 10.4x TEV / LTM rev Debuts at 5.4x Debuts at 8.5x Debuts at 15.2x ▪ Select private CSS companies backed by private equity heavyweights and primed for 2021-2022 IPOs ▪ Our CSS index, the first to track how public CSS investments are valued, includes names such as: ▪ 2020: c.43 consumer IPOs ▪ Airbnb and DoorDash defied the coronavirus economy, saw attractive public valuations ▪ Private consumer companies followed, making for a lively 2021 IPO market About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Aug-21 Q&A with investors Debuts at 22.2x Debuts at 27x 14 Robust M&A deal activity CONSUMER SUBSCRIPTION SOFTWARE Source: Capital IQ and Pitchbook as of 21 July 2021 = GP Bullhound provided transaction advisory services Date Target Buyer Category Value ($m) TEV/ LTM revenue Aug-21 Health and Wellness 3,000.0 - Aug-21 Prosumer - - July-21 Outdoor - - July-21 Fitness 300.0 4.0x Jun-21 Entertainment - - Jun-21 Utility - - Jun-21 Education - - May-21 Sports 250.0 - Apr-21 Sports - - Mar-21 Education 500.0 - Date Target Buyer Category Value ($m) TEV/ LTM revenue Mar-21 Outdoor - - Mar-21 Music - - Feb-21 Social 1,730.0 8.2x Feb-21 Utility 1,000.0 - Jan-21 Utility 600.0 - Dec-20 Entertainment 1,180.0 - Sep-20 Fitness - - Aug-20 Education 792.0 4.0x Jul-20 Fitness 345.0 - Jul-20 Entertainment 325.0 - Notable deals About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 15 Private financing surging CONSUMER SUBSCRIPTION SOFTWARE Source: Capital IQ and Pitchbook as of 21 July 2021 = GP Bullhound provided transaction advisory services Date Issuer Lead investor Category Investment ($m) Aug-21 Finance 100.0 Jul-21 Health 75.0 Jun-21 Music 50.0 Jun-21 Finance 100.0 Jun-21 E-commerce 130.0 May-21 Analytics 40.0 May-21 Health 540.0 May-21 Finance 900.0 May-21 Analytics 88.0 May-21 Home 50.0 Date Issuer Lead investor Category Investment ($m) May-21 Education 225.0 May-21 Analytics 20.0 May-21 Education 50.0 May-21 E-commerce 227.0 May-21 Health 100.0 Apr-21 Finance 260.0 Apr-21 Education 68.0 Apr-21 Entertainment 60.6 Apr-21 Education 75.0 Apr-21 Fitness 220.0 Notable deals About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 16 GP Bullhound key CSS insights 17 CSS flywheel attributes to drive premium valuation CONSUMER SUBSCRIPTION SOFTWARE A key valuation driver for investors is the concept of winner- takes-all in CSS apps; if the company has the potential to dominate a niche or a broader market through network effects, investors will pay up It is important for entrepreneurs to understand their competitive positioning and be able to define their market niche We advise buyers on CSS opportunities using our flywheel Recurring revenue Premium content Proprietary data User acquisition Monetisation & pricing strategy Niche user base vs. large TAM Churn/ retention ▪ Monopoly in a small market can be lucrative ▪ Large TAM apps need to prove differentiation and moats (e.g., fitness apps) ▪ Create a compelling benefit to convert users from free to paid ▪ Free to paid conversion rates are critical KPIs ▪ Efficient user acquisition & conversion with viral element ▪ Targeted ads, call to action, SEO, & sharing content proven successful ▪ User data retained & utilised within app ▪ Network effects from existing user base, reinforcing proprietary content and/or monetised data ▪ Churn of consumer subscriptions will be higher than traditional enterprise SaaS models ▪ LTV/CAC a KPI to watch ▪ Intuitive UI paired with high-quality content ▪ Design & UX crucial to convincing consumer of premium product ▪ Verticals expanding as consumers become more comfortable paying for apps About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 18 LTV captures a user’s gross profit that is ‘scheduled’ to be delivered to the company over the lifetime of the user Truth about LTV CONSUMER SUBSCRIPTION SOFTWARE (1) ARPU: average revenue per user; GM: gross margin Definition of LTV (lifetime value) Formula1= (ARPU ∗ GM%) Churn Rate To estimate LTV in early-stage companies: Find the locals Illustrative user profiles High engagement Connect data sources Find the service through a friend Integrate the service into their life Low engagement Do not input data Find the service through an ad Try lots of services Sign up through discounts ▪ The formula assumes that all users eventually churn at an even percentage each year or average. ▪ It does not take into consideration factors such as: upsells and re- subscriptions LTV does not account for fundamentally different user profiles – discounts the ‘locals’ that stay for LIFE and over-emphasises the high ‘tourists’ churn LTV issues Measurement solutions The LTV formula has several issues that need to be understood: ▪ LTV engagement – comments, photos, shares, posting activity, connecting data sources, and logins ▪ Track auto-subscribe from Apple/Google ▪ Web-users versus app only ▪ Tools to measure engagement – RevenueCat, AppsFlyer, Recurly, etc ▪ Divide users into ‘locals’ vs ‘tourists’ cohorts by looking at engagement metrics ▪ Estimate the value of ‘lifetime users’ in the local cohort and then calculate each cohorts’ LTV ▪ Focus on the acquisition of ‘locals’ and optimise marketing not for just sign-ups and return on advertising spend (ROAS), but for long-term usage ▪ Discuss your average LTV, as it’s important for your customer acquisition cost (CAC) payback, but ensure you highlight the potential of your ‘locals’ ‘Average’ user LTV Days from acquisition RetentionDebunking the issues of customer lifetime value About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 19 The new era of customer acquisition is organic CONSUMER SUBSCRIPTION SOFTWARE Traditional customer acquisition channels Modern customer acquisition channels Email Schools Partnerships Strategy CSS companies Create a community of passionate users that use the CSS platform as a meeting place Build a strong brand within app stores that intrigues new potential users Leverage infrastructure to create engaging and exclusive content that attracts new users Utilise friends and family networks that create a presence for the company across the Internet Provide a free tool for users that leads to upgrades for additional functionality Support power users who advocate the product to potential customers Leverage scalable content to attract users About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics ▪ Organic customer acquisition strategies are critical for CSS companies ▪ Generating a sustainable, low customer acquisition cost (CAC) delivery model is crucial to ensuring a sustainable, profitable subscription business ▪ Successful, new-age CSS enterprises leverage low-cost or free channels to find and attract customers Each CSS business must choose a strategy to find new customers and integrate that into its services as a feature or integral part of the offering. The customer acquisition method is then organic or less invasive to the consumer, resulting in higher conversion and retention. Past insights Q&A with investors 20 Internet browser extensions can be big businesses CONSUMER SUBSCRIPTION SOFTWARE Note: 1) Debugbear; and 2) Statista – Global desktop Internet browsers market share 2015-2021 Category highlights Example extensions Benefits A browser extension is a small software module for customising a web browser Browsers typically allow a variety of extensions, including user interface modifications, ad-blocking, and cookie management Only 4.7% of extensions support a payment fee(1) Google Chrome 67% of global desktop Internet browser market share(2) vs vs FREE # of Google Chrome extensions globally 137,345 Integrate directly into daily workflows Capture data through web browsing Optimisation with scale Built-in distribution through browsers CRM, Marketing E-payments, Finance EdTech, E-learning Sales Extension Media Chrome extensions About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Productivity Security Note taking Q&A with investors 21 Hardware unlocks the modern-day subscription CONSUMER SUBSCRIPTION SOFTWARE Connected hardware has become a trojan horse for a recurring software subscription but consumers are smart – the software must enable a better service and constantly keep the experience refreshed – a true symbiotic relationship Security Fitness Others Health This trend began with connected fitness, but hardware-enabled software has expanded into many new verticals Once users commit to the hardware purchase, the expected retention rate for the subscription is high Hardware acts as an anchor, reducing the churn from customers leaving for marginally better or cheaper platforms The combination personalises the experience, creating a passionate group of users who evangelise the product due to the customer benefits Hardware and software are symbiotic with each, making the other more valuable to the consumer – incentivising the hardware purchase and ensuring use About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 22 Chinese media giant Tencent reported that nearly 3x more revenue came from CSS than online advertising in 2020(1) Western CSS versus Eastern micropayments CONSUMER SUBSCRIPTION SOFTWARE Note: 1) Tencent 20-F, 2021 Eastern payment models Western CSS business models Western CSS platforms Eastern CSS platforms Western users focus on discrete, specialised apps that address specific use cases While Western users are often willing to subscribe to different apps, too many can add up, be hard to keep track of, and lead to fatigue As a result, developers are opting for options that allow them to capture ad revenue from free users who choose to build their own stacks Micropayments through tipping, donations and pay per episode have become widespread Users prefer comprehensive ‘super apps’ for all their app-based needs, including messaging, personal finance, and entertainment Users can quickly connect their profiles to a variety of services using existing Alipay or WeChat payment platforms Spotify’s users were free in Q4 2020 55% Integration | The evolution of the consumer experience ‘Pay per engagement’ platforms are rapidly expanding in the West, led by Patreon, Cameo, and OnlyFans Use cases where users only want limited engagement can still be monetised to encourage them to subscribe Customised and exclusive offerings involving customised messages, photos and limited merchandise are attracting more users to digital experiences Rapid expansion of subscriptions given the benefits for both the user and businesses About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights N S W E Q&A with investors 23 Expert views from company builders 24 LAND AND EXPAND WITH HARDWARE WHY MONITISE TO PARENTS IN A CSS MODEL VERSUS SCHOOLS IN A LICENSING MODEL? In its early days, PlayOn! Sports explored both models – selling to schools and selling to fans. Ultimately, we chose the subscription model for fans as selling to schools is extremely challenging; schools have limited budgets for discretionary expenses and those budgets are tied to tax revenues and overall economic health. Budgets can be very cyclical and lead to substantial churn among schools. Ultimately, the model we chose was to invest up-front and install automated production cameras at schools for free. This upfront investment won over the schools and significantly reduced sales friction. We also found that parents love the convenience and easy to manage subscription offerings to watch their kids play sports. This has resulted in attractive unit economics for PlayOn! Sports leveraging a CSS model. WHY DID YOU FOCUS ON STREAMING VS. BROADCAST TV FOR LOCAL SPORTS? High school sports occur in every city in the US with over 3 million events a year. Each event has a limited, albeit passionate audience, that makes it difficult to justify an expensive TV production. There are some marquee high school events, like football and basketball games, that are carried on local TV channels, but the rest of the high school sports ecosystem doesn’t have the audience base to justify television production and distribution. Instead, PlayOn! Sports has leveraged technology advances, such as automated production camera technology and Internet streaming to be able to produce ANY AND EVERY high school event for an extremely low marginal cost. By standardising our model, we have a national distribution footprint consisting of local coverage. Each event drives incremental subscriber acquisition and significant retention as high school sports is worshipped in most US states. With our increased scale, we covered over 300,000 events this school year and expect to cover over 1 million in 2021/22 school year. WHAT IS PLAYON! SPORTS’S USER-ACQUISITION STRATEGY AND WHY HAS IT BEEN SUCCESSFUL? PlayOn! Sports works with the state athletic associations and the individual high schools as partners, where we all provide services to the other. PlayOn! installs automated production cameras, which allows the schools to promote their athletic events and enables high school fans to watch their teams – regardless of where they live. In exchange, PlayOn! Sports benefits from proprietary local content that has a passionate and sticky audience base. PlayOn! sells consumer subscriptions, and the schools and associations benefit through a revenue share. Our partners utilise their marketing channels to generate organic referrals which dramatically lowers our CAC. As we enter new markets or launch a new school, we utilise paid marketing through the traditional digital marketing channels to let parents know of PlayOn! Sports’s service and to build a base level of users. We keep our CAC low by marketing individual events to a very targeted audience, but we do this at massive scale. ARE YOU CONCERNED ABOUT THE CHURN OF CUSTOMERS LEAVING THE SERVICE? At PlayOn! Sports, we have two groups of customers – ‘content partners’, the schools & athletic associations and the ‘end viewers’ – fans/parents/students/alumni. We are extremely focused on ensuring that the schools and athletic associations feel valued and have a great experience with the partnership. So far this has been very successful as we have had non-existent churn in schools over the last 4-5 years. On the customer front, we built our model to include churn as sports seasons end, students graduate, etc. However, our model features a low cost-of-content and our CAC remains affordable and predictable given the organic nature of our customer acquisition strategy. This enables us to operate with profitable LTV and unit-economics even with predictable end-viewer churn. David Rudolph CEO MISSION We deliver live US high school sports events to fans whenever and wherever they want it LONG-TERM VISION Cover every US high school game across every sport and then apply our model to other niche sports or underserved content verticals SCALE 300,000 games streamed in 2020/21 and more than 1 million in 2021/22 More than 700,000 active subscribers About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 25 DELIVERING PERPETUAL LEARNING THROUGH SOFTWARE WHAT DOES TOUCAN DO AND WHY DID YOU CHOOSE A CSS MODEL VS. ADVERTISING? Toucan is a web browser extension that helps people learn a new language while going about their day. Each time you visit a website, Toucan picks certain words to translate into your new language so you can learn them within the context of a language you’re already comfortable with. We chose a CSS model so we could offer a compelling free product while creating a compounding and predictable business model that grows and sustains the company. With a premium subscription tier, we can offer high quality features that our customers expect and demand and still provide a high-quality free experience for anyone interested in learning a new language. WHY DID YOU AND YOUR TEAM DECIDE TO BUILD TOUCAN AS A BROWSER-BASED BUSINESS VS. A MOBILE APP BUSINESS? The short answer is that we wanted to meet people where they were… The three co-founders of Toucan have worked at some of the best consumer tech and mobile app companies in the world, including Headspace. And a huge, consistent problem with consumer educational products is that it’s hard to get people to take time out of their busy day, even for just a few minutes. Plus, competition for time on people’s phones is only going to get more intense. So, rather than be one more thing on someone’s to-do list, we decided to build Toucan on top of people’s existing Internet browsing behaviour so they could learn while they went through their normal day. Not to mention, there are approximately 200,000 Google extension offerings vs. millions of apps, so the competition is substantially lower. DO YOU HAVE ANY CONCERNS THAT THE MAJOR BROWSERS MAY SUDDENLY BLOCK TOUCAN? Nope, not at all. Most browsers are looking for ways to differentiate themselves and become more valuable, useful tools for consumers. Toucan makes people’s time on these browsers even more valuable, while also respecting their privacy. In fact, we have such confidence in the browser extension ecosystem that we’ve recently launched on Safari, Firefox, Brave, and Edge. WHAT’S NEXT FOR TOUCAN? We’re focused on making Toucan better and reaching even more people with it. That means launching on more browsers, adding new languages to learn, and polishing the core experience so that we can teach better and more effectively. We’re already rapidly winning over consumers and converting them to our paid product. Taylor Harlow CEO MISSION To make the world bilingual LONG-TERM VISION To create a healthy, empowering community that breaks down cultural barriers SCALE 150,000+ monthly active users (MAU) About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 26 SEXY AUDIO STORIES THAT SPARK YOUR IMAGINATION AND MOOD WHY BUILD DIPSEA AND WHO IS YOUR TARGET CUSTOMER? We are helping women tap into their sexuality on their own terms. Lots of the female-focused solutions on the market today are clinical in nature. Most erotic entertainment is made by and for men, but women have the same demand for content. We saw a big gap in female focused content. Our core demographic is women aged 18 to 34. Dipsea solves that big gap in content by providing our users grounded in aspirational reality and designed to inspire through imagination and fantasy. WHY CHOOSE CSS VERSUS OTHER REVENUE STREAMS? A CSS business model is great for Dipsea for a few reasons. Our users have a regular demand for our content – we are closer to Netflix versus a dating app. We consistently refresh our content so that our users find something new every week – resulting in continuous entertainment deserving of a subscription. Finally – our users crave a premium experience and have become comfortable with a subscription offering. DO YOU WORRY ABOUT PEOPLE BECOMING SUBSCRIPTION FATIGUED? Not really. As long as the subscription is providing value and people are using the app consistently and it's making their life better, they won’t cancel. WHAT IS YOUR USER ACQUISITION STRATEGY? Currently, a large part of our growth is organic. Investors weren’t sure if people would want to talk about erotic content when we started pitching Dipsea. There has been a big cultural shift in willingness to talk about personal issues and interests more. Younger people are just more comfortable sharing in this category. In addition, Dipsea by its nature, is a press worthy topic so we get solid engagement there. We are also leveraging paid channels and have had a lot of success with podcast advertising. Given the similar audio experience, we have found a lot of users through dating and female focused podcasts. Faye Keegan CTO/CO-FOUNDER MISSION Empower women to tap into their sexuality on their own terms LONG-TERM VISION Become a trusted partner for women as they move through their lives SCALE The idea that what we make is niche is wildly incorrect HOW HAS YOUR VISION FOR THE COMPANY EVOLVED? Our Core mission is still the same - serving women in this space still has so much room to grow. While our core demo is 24- 35, our fastest growing category is 18-24. But we will continue supporting women throughout major points in their lives. About us Market update B C A Key insights Q&A with Co-Founder Ecosystem Metrics Past insights Q&A with investors 27 VENTURE CAPITAL MANDATES FOR CSS BUSINESSES HOW DO YOU THINK ABOUT THE EVOLUTION OF THE CSS INVESTMENT ECOSYSTEM? DCM believes that we are in the middle of a big shift in the consumer Internet. Historically the primary method has been monetisation through ads or the sale of data and now we believe subscriptions will come to be very important. We see three characteristics where CSS businesses have the potential to be category winners – High gross margins, Recurring revenue, Potential for exponential growth with organic customer acquisition. HOW ARE YOU PICKING WINNERS IN THE CONSUMER TECH SPACE? The first thing we do in any CSS investment is ask ourselves how these businesses are growing. Are they acquiring customers efficiently with primary organic customer acquisition methods? Do they have a unique organic strategy of finding consumers or generating word-of-mouth growth? Second, we focus on subscription retention, which is key for DCM. At the earliest stages, retention calculations are more guess work vs. a pure science. To arrive at a proxy, we look at what we believe are the early symbols of high retention businesses – WAU/MAU levels. One thing that is always hard is TAM or market size. VCs are bad here, so we think about it last. Examples of ‘investment no’ for DCM include: • Payback on CAC > 12 months and no sure way to get payback timelines to trend down • Limited organic need for product • The core audience is hard to find • Lots of competition already WHAT IS ONE THING FOUNDERS CAN FOCUS ON IMPROVING AT THE EARLY STAGES OF THEIR BUSINESS? Poor pricing strategy is a big area for improvement. A lot of CSS businesses underprice the value they bring to consumers. Founders need to ask – what am I replacing or improving in someone’s life? For example, Breathwork is a mindful breathing business that we are a fan of. How do you create a price for breathing – which someone can do for free now? DCM INVESTS IN CHINA AND THE US - HOW DO YOU THINK ABOUT CONSUMER BUSINESSES IN EACH COUNTRY? The prevailing wisdom is that Asia is leading with its superapps like WeChat and Alibaba, but users in China are not used to paying for apps in the consumer subscription model. They are instead interacting in a more transactional model by either tipping influencers or buying individual content. I think that is why you have seen some of the Western apps become so powerful globally as they can leverage their subscription revenue to grow faster and add more services. David Cheng PRINCIPAL MISSION DCM partners with inspired entrepreneurs to build high- impact, global technology companies Its global DNA and extensive industry expertise are foundational to maximising the success of the entrepreneurs INVESTMENTS About us Market update B C A Key insights Q&A with the CEO Q&A with investors Ecosystem Metrics Past insights 28 VENTURE CAPITAL MANDATES FOR CSS BUSINESSES HOW DO YOU THINK ABOUT THE EVOLUTION OF THE CSS INVESTMENT ECOSYSTEM? TCG is staying very active in our core consumer verticals which includes CSS as well as ad driven and ecommerce business models. One thing we have noticed is that a lot of businesses that don’t have a natural need or fit for a subscription product are trying to shoehorn in a subscription model. For example, a great business that gets a lot of website traffic and engagement tries to integrate a subscription offering. That may ultimately be less successful vs. keeping the top of the funnel wide open and integrating ads or ecommerce options. Consequently, we are seeing the blurring of the edge of traditional CSS businesses. Another trend we have been seeing is that traditional enterprise SaaS terms have become very ubiquitous. Consequently, some of these terms have been adopted by consumer businesses where they don’t accurately capture the true business KPIs. In a lot of cases these consumer businesses are trying to use the same ‘SaaS Lingua Franca’ to speak to investors and it can cause confusion – i.e. – what does CSS ARR truly mean? HOW ARE YOU PICKING WINNERS IN THE CONSUMER TECH SPACE? TCG has deep consumer DNA from our founding days. We look for businesses that were created out of authentic passion. Businesses where the founders built something that they and their friends wanted to have and felt the market need. We stay away from ‘born in a boardroom business’. For example, within our portfolio, some of the best consumer tech businesses are accidental companies built out of pure passion. We invested in Surfline, which has been around for years. The founder built the business up over time with one north star – real surfers need to know the conditions of the waves. They started monetising with ads and gradually graduated to consumer subscription offerings. HOW DO YOU THINK ABOUT VALUATION FOR CSS BUSINESSES AS AN INVESTOR? Valuation is just one aspect of our evaluation process. We love durable and passionate businesses that have the opportunity for blended business models - commerce/content/ads/subscription/data access. Ideal investments for us have more than one revenue stream or the potential to add more ways to provide value to their customers. Our primary focus is more on the brand and consumer engagement and then we get to valuation. Luke Beatty PARTNER MISSION TCG invests in companies that define culture and focuses on the media, entertainment, technology, sports, and consumer and digital media sectors INVESTMENTS Linus Walton VICE PRESIDENT About us Market update B C A Key insights Q&A with the CEO Q&A with investors Ecosystem Metrics Past insights 29 Current CSS ecosystem If we skipped your company – click here to get in touch! 30 CONSUMER SUBSCRIPTION SOFTWARE About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Entertainment Past insights Entertainment was a source of the explosion of CSS businesses, led by Netflix and Spotify but recently joined by new entrants such as Mubi and PlayOn! Sports Q&A with investors 31 CONSUMER SUBSCRIPTION SOFTWARE Fitness / Outdoor / Lifestyle About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights The Fitness / Outdoor space has been the leader in converting freemium users to paid. Many of these companies started offering a free or ad supported tool, but have gradually shifted towards a CSS revenue model for their biggest fans Q&A with investors 32 CONSUMER SUBSCRIPTION SOFTWARE Prosumer Health & Mindfulness Personal Finance About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights There has been significant growth in these categories, with many existing unicorns (Greenlight, Calm, Noom, and Asana) and future unicorns (Grammarly, Flo, Natural Cycles, and Speechify) Q&A with investors 33 CONSUMER SUBSCRIPTION SOFTWARE Edtech Family/Dating Other About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Edtech and Family / Dating have had an incredibly challenging yet positive performance through the pandemic as schools and singles shifted to online ways to engage – keep a close eye on the Other category as new and exciting CSS businesses are started daily Q&A with investors 34 The pool of CSS investors continues to grow SIGNIFICANT RELATIONSHIPS WITH SPONSORS Premier CSS financial investors About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 35 CSS metrics to watch 36 Implementation difficulty Average revenue per user (ARPU) Enterprise SaaS vs. consumer subscription CONSUMER SUBSCRIPTION SOFTWARE Source: Nico Wittenborn at Adjacent (@Adjacent on Twitter) Investors look at many of the same investment metrics as SaaS companies, but key nuances are important to recognise, and CSS businesses will have a different definition of success Higher early user churn is typically the biggest hurdle for traditional investors to overcome, but entrepreneurs can highlight low customer acquisition cost (CAC) and long-term retention to illustrate the staying potential of their CSS business. Consumer subscription Enterprise SaaS Mass market potential Word of mouth (WOM) distribution Churn Content sharing Expansion revenue Acquisition costs About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Higher Higher Higher Higher Higher Higher Higher Higher Past insights Q&A with investors 37 Investor benchmarking criteria CONSUMER SUBSCRIPTION SOFTWARE CSS investors evaluate each business based on its own unique attributes as well as sub-industry nuances There are industry standard metrics that help investors differentiate good businesses from great businesses Annual user growth rate <50% 100%+ <60%+ 90%+ Gross margins <3x 6x LTV/CAC 1st pay period churn rates >50% 20% <2% 10%+ Free to paid conversion rate <0.5x 2.0x Sales efficiency ratio About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 38 ▪ Investors will look closely at users – including the free users, active users (MAU) and most importantly the paid users ▪ CSS top-line revenue can be measured in several ways: – Cash bookings: Amounts received each month in upfront subscription payments – Monthly recurring revenue (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% and 70% of total sign-ups − 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 cohort layer cake’ − Exceptional 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 <3 month is critical to counter the high churn of initial users ▪ 50%+ of users coming through organic channels is generally considered great ▪ Free users: Number of users using the platform or business. Typically measured monthly or MAU ▪ Paid users: Number of users paying for a subscription (typically monthly or annually) ▪ 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 ▪ Growth is of paramount importance, with excess cash being used to fuel growth ▪ Important, therefore, to understand the cash burn in the business and planning for capital efficient hyper-growth ▪ 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 (UGC) to enhance its offering ▪ 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 proven to be willing to pay up for CSS businesses leveraging UGC to provide a unique service Investor dive into key CSS metrics and KPIs CONSUMER SUBSCRIPTION SOFTWARE Top-line growth metrics – user growth & bookings MRR/ARR LTV/CAC ratio Free to paid conversion rates Free cash flow / burn rate Gross margins About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 39 ▪ Normalised measurement of recurring revenue, most frequently measured with a constant value in each month of the subscription period ▪ Amount of gross profit a customer is calculated to deliver to the company over the lifetime of the customer ▪ The number of months a company requires to pay back its cost of customer acquisition ▪ Gross churn is the number of customers lost in a given period or cohort regardless of account expansion or growth ▪ Net churn is the number of customers gained or lost in a given period or cohort after taking into consideration new, reactivated, or expanded accounts Key CSS definitions & formulas DEFINITIONS & CALCULATIONS Top-line growth metrics – user growth & bookings MRR/ARR Customer lifetime value (CLV) Payback period Churn (gross & net) ▪ All S&M expenses for new customers. Sometimes excludes personnel management S&M costs ▪ Typically measured over a month or quarter ▪ Includes users acquired through free and paid channels Customer acquisition cost (CAC) CAC = S&M # of new customers CLV = ARPU ∗ GM Churn rate Payback period = CAC ARPA ∗ GM Net churn = (customers lost over time period − customers gained over time period) customers at beginning of time period Gross churn = customers lost over time period customers at beginning of time peirod MRR = # of paying customers ∗ ARPA/month Metric Definition Calculation About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 40 Past CSS insights B C A 41 Paid experiences Riding leaderboards Download maps Meditation classes Wearables integration The importance of the paywall CONSUMER SUBSCRIPTION SOFTWARE Gaining users through a ‘freemium’ offering is critical to encouraging people to try a product; however, to effectively monetise 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 Success in the CSS space depends on placement of the paywall within the customer’s experience Free experiences One video story One free class Three free books 7-day trial 1 2 3 Gain the customer contact information, download app, and enter credit card details Entice interest in the product Highlight features that are included in the paid version About us Market update Past insights B C A Key insights Q&A with the CEO Ecosystem Metrics 1 2 3 Monetise and increase customer engagement and provide unique value Encourage sharing and create user generated content (UGC) Continuously improve product to attract adjacent users Goals Goals Q&A with investors 42 Overcoming churn to build the ‘cohort revenue layer cake’ CONSUMER SUBSCRIPTION SOFTWARE Source: GP Bullhound proprietary analysis Cheetah Thoroughbred As entrepreneurs build their companies, they can typically invest in growth marketing or product innovation to drive retention Focusing on engagement and mitigating churn will result in a better long-term business than high growth and flashy advertising 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Cheetah 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 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Throughbred 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 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Cheetah 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 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Throughbred 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 105,000 users by month 6 47,000 users by month 6 New user marketing is cut Long-term valuable customersWhat would you invest in? About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights ▪ Growth: Adding 30,000 users per month with celebrity promoters and heavy Instagram presence ▪ Usage: Limited customisation of the service and a priority on notifications to consume content ▪ Cohort Churn: Retains 40% of customers by month 6 and only 10% by month 12 ▪ Growth: Adding 10,000 users per month leveraging targeted marketing through partnerships with limited social media marketing ▪ Users leverage the data to manage their personal health information and have synched data input into their fitness tracker ▪ Cohort churn: Retains 68% of customers by month 6 and 50%+ by month 12 (effectively having the cohort become flat) Q&A with investors 43 Essential building blocks of subscription development CONSUMER SUBSCRIPTION SOFTWARE Companies are quickly building the ‘pick-axes and blue jeans’ companies of the CSS gold rush Omnichannel tools are becoming market ready to allow niche consumer subscription companies to launch quickly Subscription management Marketing management Messaging infrastructure Reporting & analytics Payment processing + About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors 44 0 20 40 60 80 100 120 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 Pandora-Revenue ($m) Spotify-Revenue ($m) Pandora-Paid Users (m) Spotify-Paid User (m) Historically, investors have been conditioned to believe that consumers will always prefer a free option supported by ads versus paying 1 That was true in the early ages of the Internet, but consumers are waking up to the pitfalls of ‘free’, including intrusive ads, the sale of personal data, and poor product quality 2 Pandora and Spotify started as free apps, using ads to generate revenue, and that is where the story diverged 3 Spotify focused on UX, adding features like downloading songs and playing music offline behind paywall – paid users quickly accelerated, revenue surged 4 Pandora focused only on ads, was late to the subscription game, and was ultimately sold to Sirius 5 Free + advertising versus paid subscription – the ultimate test CONSUMER SUBSCRIPTION SOFTWARE Sources: Capital IQ and Pitchbook (2020 estimates from Capital IQ) Pandora versus Spotify Paid vs. free content battle vs. vs. vs. vs. vs. vs. About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Q&A with investors Spotify paid subscription launched 45 Pricing versus utilisation CONSUMER SUBSCRIPTION SOFTWARE Sources: Public data and GP Bullhound research; 8tracks, $30/yr; rever, $48/yr Annual subscriptionpriceHigh Low Usage frequency < Monthly Daily $168 $120 $100 $100 $60 $80 $60 $45 $150 $40 $30 $99 $10 $70 $36 $99 $70 $80 $39 $71 $80 $24 $45 $60 $80 $80 $30 $47 $71 $90 $80 $60 $50 $119 $128 $120 $120 $144 $100 $60 $144 About us Market update B C A Key insights Q&A with the CEO Ecosystem Metrics Past insights Our research has shown that consumers are willing to accept a higher price in exchange for high usage frequency Q&A with investors 46 GP Bullhound overview Build the future 47 A leading technology advisory and investment firm ABOUT GP BULLHOUND Note: 1) League table data represents selected transaction advisors; time period: 2016-Q4 2019; global M&A transactions between $10m and $300m GP BULLHOUND FUND III GP BULLHOUND FUND IV GP BULLHOUND FUND V GP BULLHOUND FUND IV GP BULLHOUND FUND IV BLISS POINT BALTIC CLASSIFIEDS GROUP LINKFLUENCE JELLYFISH SPOTIFY SLACK UNITY GLOVO LINGODA OXBOTICA PARTNERIZE COOLTRA TECHNOLOGY PREDICTIONS TITANS OF TECH NOBODY MARBELLA INVESTOR ALLSTARS Mergers & Acquisitions Investments Capital Transactions Insights & Events ▪ No. 1 global advisor (1) to leading technology companies in competitive international sale and acquisition processes ▪ 430 successful M&A transactions completed to date, with a total value of over $20bn ▪ GP Bullhound’s funds provide investors with access to global category leading technology companies ▪ Our assets under management total more than $500m and our limited partners include institutions, family offices and entrepreneurs ▪ Leading global advisor to companies and their owners on capital transactions including venture, growth, debt, acquisition funding, secondary block trades and initial public offerings ▪ 120 rounds of financing for technology companies completed to date, with a total value of $2bn ▪ Our events bring together thousands of leading technology entrepreneurs and investors throughout the year ▪ Our global insights team publishes thought-leading research read by decision-makers and medias, worldwide KLARNA CUSTOMER THERMOMETER ECOVADIS NORTHERN TECH AWARDS CONSUMER SUBSCRIPTION SOFTWARE –ABOUT GP BULLHOUND No information set out or referred to in this research report shall form the basis of any contract. 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