Casey Winters: belief

Transcript context

…I think in order to understand these businesses, you have to start with, why do investors like B2B SaaS? Why do they like B2B subscription? I think the way most people respond to that question, they say like, "Oh, predictable revenue, right?" It's like, ah, sure. That's cool and all, but I think that's actually not the most important. I'd argue there's two great attributes of B2B SaaS. One is that businesses are more predictable in how well they're routine. They're rational. You can understand who are good versus bad businesses for your product, as well as which ones are going to grow versus go out of business. More importantly, the second thing that's great about B2B SaaS is net dollar retention. What is net dollar retention if you don't work at SaaS? Well, as a SaaS company, some of your customers are going to churn. Some of your customers are going to stay. Normally, normally outside of potentially current macroeconomic conditions with all the layoffs, when customers do stick around, they tend to spend more. Either they buy more seats if you're a seat-based model, or they use the product more if you're a usage model. The SaaS company just makes more money in year two, year three, et cetera. Consumer subscription just doesn't have any of these benefits. Consumers are way less predictable. They tend to retain worse than businesses, and they also don't have net dollar retention characteristics. If the user retains paying you in year two, you probably making the same amount that you made from them in year one, not more. What that means is you need higher user-based retention than B2B SaaS businesses with more unpredictable users, and it's a lot higher than, I think, founders tend to think. We're talking annual retention that needs to be north of 60, perhaps even 70%. You look at who's actually been able to do that at scale, and it's a really small list. Netflix in the U.S., Amazon Prime, Spotify, Duolingo, I think, is emerging as one of these players that's making it work. When you look at how they do it, they're either doing it with massive OPEX and economies of scale, or through a network effect, or some other bespoke growth loop that's not that easy to replicate. Duolingo has a strong data network effect. The lessons get better the more people use it. Beek, the company I'm on the board of has a cross-side network effect between creators who create the content and the listeners, and the creators bring a lot of distribution from their existing social networks to bring new people in the app to listen. Netflix and Amazon, they spend billions of dollars on content. I think the default path of like, "I'm going to spend money on paid acquisition. I'm going to retain half of my audience year-over-year." That's just a path to go on eventually. I think what's interesting about these businesses is you can model it so you can learn when it's going to happen. You can learn when the retention dips, and when you can no longer profitably acquire users. nk what's interesting about these businesses is you can model it so you can learn when it's going to happen. You can learn when the retention dips, and when you can no longer profitably acquire users. If you want to look at a model in real time, just look at Blue Apron. The company raised $300 million in an IPO that valued it at $2 billion. It's worth $50 million today on the New York Stock Exchange. I think people understand now, if they didn't before, that paid acquisition tends to get worse as you scale. You target the best customers first. They have great conversion, great retention, and then as you expand your targeting of new customers, every one of those metrics gets worse until it's no longer profitable. Maybe two years from now, it may be be five years from now, but eventually, it'll be no longer profitable. What network effects allow you to do is they allow your product to get better faster than the customers you target get worse, normally, through increased selection, like some of the examples we gave with DoorDash and others. This is such a cool topic. I actually have a post about this that I recalled now as you're talking about it. Just to double-click on the retention point and it's like, freaks you out when you really get into it. That say your retention is like 70% cohort retention for a year. I forget the math, but every three or four years, you basically have to rebuild your entire user base because it just, it keeps trickling out, so your growth just has to continue-…

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