In my bio on this blog, I mention that I am also looking at 'IoT or hardware products if linked to a subscription model.' A couple of people asked me recently what I mean by that.
Don't get me wrong. I am a software investor. This is what I know, and invest in. Not hardware only plays. However, I always believed that the value proposition of some software businesses, including B2C SaaS apps, can be enhanced by adding the option to integrate a hardware component during the user journey. The reason is simple.
Getting someone to subscribe to a mobile app is much easier (it is cheaper, revenues are recurring) than having to sell a hardware product (more expensive, revenues are one-off...). But often, you can only do so many things with a software-only product. Let's have a look at the case of consumer subscriptions. While these products allow you to onboard many users at scale, it also means that many will churn (see this post 'Why are investors obsessed with churn?'). Whatever the reasons, you will lose a big chunk of your users in the early days as they are getting to know you. Once your cohorts stabilize after a couple of months, your #1 job is to keep retention stable. Usually, there is limited upselling potential for B2C SaaS (besides future price increases - just check what you paid for Netflix two years ago vs. what you are paying now every month 😜). Therefore the net churn metrics are usually less compelling than in B2B. But if you can retain your consumers, gross figures tend to resemble after the first 2 quarters.
Enhancing B2C products with physical products or experiences can have a positive impact on retention. In the past, people used to put businesses into two categories: either you are a software business, or you are a hardware business. But those lines have been blurring for quite some time. Just think Peloton. Have a look at these cool data points my buddy Marco published.
Annual retention and LTV figures are best-in-class. As you can see, most of these services are hardware first: they offer a set of physical products or experiences (requiring substantial upfront investments from the subscribers) that integrate a subscription model to deliver value for consumers. I believe a similar impact on retention can happen for software first products when upselling hardware products along the user journey. When you can touch something, and you paid decent money for it, it is just more difficult to let go... Of course, you can not only slap a hardware product on top of an existing software offering, but you need to design your products to integrate both worlds intentionally. A couple of our portfolio companies are experimenting with this. I will keep you posted on how it goes. If you have any learnings to share, please drop them in the comments section below.
I spent last weekend in the countryside with old friends. Some from Europe, some from the US. One of them has an old family mill (3rd generation already...) that he is renovating. We stayed there. We joked that we would probably never have done this without the confinements in our respective countries. Not all about the current times is terrible... I am grateful for these moments and will make sure I have some more before things open up again.
Life is awesome,
Yannick
Other content I liked- A great analysis of Olo's initial S-1 statement by Jamin. Olo provides a cloud-based, on-demand commerce platform for multi-location restaurant brands. It is a transactional SaaS business, and is expected to go public in about 5 weeks. Some metrics look exceptional, considering though that revenues are still small for a public SaaS business, with <$100M LTM revenues. If the listing process goes well, Olo will be the smallest public SaaS company. I like that. Companies should go public if they can.
- For all marketplace founders out there, here a cool valuation matrix from our friends at FJ Labs in NY
- Gaming is big, and so will be cloud gaming. Have a look at this:
- A great post by Fred on QR codes. As discussed in our post on the 'contactless economy', some product and demand shifts that will outlive this pandemic are formed only now. QR codes might one of them. 'QR Codes have been with us for as long as there has been a commercial Internet.' But I barely ever used them. 'All changed during the pandemic. In an era when stores and restaurants wanted to maintain as much social distance as possible, I saw QR codes popping up everywhere. Most of us are now very proficient scanning a QR code on our phone and getting taken to a web page. Now that we are all much more comfortable with QR codes, we will see them being used for more and more things. They are a very powerful way to quickly transfer information between a physical object and a phone.'