great tech doesn't make great VC business

#142

Dragos Novac

Jan 29, 2023

Good morning,

Welcome to Sunday CET. This week’s lineup:

great tech doesn’t make great VC business
are podcasts dying?
Danish disrupting themselves

Enjoy,
Dragos

Observations

Great tech doesn’t make great VC business

This week Strava announced acquiring Fatmap, a British company developing a 3D mapping product for the outdoors.

Fatmap started by doing digital maps for ski resorts in 2013 (then named Terrascope) - a vertical still little touched by tech even to this very moment - and did great hard work as they put satellite and aerospace imagery on top of a 3D engine for powering a high-resolution global map platform with context-specific information for skiers initially and later available for mountaineers of all sorts. Really, really cool stuff.

Let’s work some quick numbers - the company has 1.6 million registered users and that probably means around 100k MAUs which, at an optimistic 5% conversion rate, also means some 5k monthly paying customers or some 60k per year. At 30 bucks a pop, we’ve got less than 2M ARR - assuming that the B2B side of it (tech licenses, affiliates etc) brings in as much, Fatmap produces somewhere in the 5 million a year ballpark.

Any VC will tell you that those are underwhelming numbers for a company that’s already raised almost 30 million in a 10 years span. A reasonable revenue expectation would probably be at least 5-10X higher, in order to justify a 3 years old likely valuation north of 50M, from the 16.5 mill series A closed back in 2020.

However. From a business perspective, those users numbers can somewhat make sense, if you have ever built a tech startup, you can totally see the trajectory up to this moment. For once, the consumer value proposition, in spite of its advanced tech, is not exactly an utility - it’s a vitamin not a painkiller - and the overall freemium numbers are small in order to make conversions work at scale, in spite of the low pricing that actually doesn't justify the tech underneath. And as I am picky person, between you and me, also the product UX, funnel experience and price segmentation are not at par with the tech - a lot of upside here. Secondly, we have passed through the covid period, which affected 1.5 skiing seasons out of two, and the 2022 start of the season was lousy too. That’s in a skiing market not growing anyways, stagnant at best. Otoh, the summer activities went up also because of covid so that’s an upside but this brings us to the third point - Fatmap’s competition is also strong, particularly in Europe, where the Germans from Komoot are more aggressive, more commercial and business savvy, without the pressure of VC investors (they don’t have any). Btw, Tim Cook met in Berlin for PR purposes with one of Komoot’s founders last September - that means Komoot is a key ad spender on the App Store, an important data point.

Those are just some superficial quick observations, and think there’s already a lot of value not extracted right there. And they don’t paint Fatmap as a promising series B VC candidate, three years after series A.

Herein lies Strava’s opportunity. Strava has a great brand, it’s gotten the distribution (100M+ users) and it’s built some great reliable data tracking tech - those are some solid competitive advantages. Not only that, but also Strava’s tech is multi sport, as sound business fundamentals dictate you leverage the tech across multiple market segments. Net-net, multisport tracking tech + maps + brand + reach = good positioning to fight against, say Apple, which lately made deep forays into Strava’s turf, and probably one of its biggest threats. Which Apple already does maps competitively, while Strava’s are not great at all.

Fatmap seems like a good fit for Strava. And I bet it was a good business deal for them either, my gut tells me they paid a 1.5-2X premium for the tech on top of the 5 mil. Could be more, as the business side is irrelevant for what Strava gets from this transaction. But even so, it is way lower for what a VC business require from their portfolio companies. Sadly, Fatmap is one of those examples of how great technology cannot provide returns on VC terms.

Strava says will keep the two as standalone ops, while it incorporates the map tech into its product. After that, it will probably make sense to fold Fatmap - the same happened with the French from Zenly, which Snapchat closed down at the end of last year. It’s just business, at the end of the day.

Are podcasts going away?

Well, they won’t disappear, but certainly the past years enthusiasm seems to be going down. Doing great content at high level on consistent basis is hard and eventually the effort will wear you down. It seems easy but it’s not, even if you are a pro. On top of that, podcasts require a bit of overhead, both for producing it as well as for promoting it on the distribution channels (that is why 20vc bought a dedicated agency, for example).

Making it a business also presents challenges as advertising is not an ideal model and D2C is complicated - either way you need to build the brand first and that takes time and resources. I guess you should be fine as a niched lifestyle biz - even better than fine at 10k paid subs as a solo gig - or as component of a larger model - again, 20vc is a handy example, as it uses the podcast as a differentiator against other VCs - but have my doubts that it really works at scale as a standalone op.

Some of the usage numbers don’t seem to indicate massive economic opportunities - only 4 out of the top 20 network aggregators reach more than 10M MAUs, and that ranking spread goes all the way down to 2M. A handy scale example is Spotify, where podcasting made up just 7% of total listening on their assets in Q1 2022, despite the massive investment in shows from the last 2-3 years. And Spotify’s huge reach is not working as the expected leverage - the exclusive show model that makes popular shows available only to subscribers of a given streamer hasn’t proven wildly successful. The Gimlet and Parcast unions announced that making certain shows Spotify exclusives reduced their listenership by as much as 75% in some instances.

Cheat Sheets

Sign up and become a subscriber from here - use SundayCET for getting 10% off at checkout.

Good to know basis

👉 How do you get investors to find you - turn the tables around
🤔 Reasons for which investors will say no - they get it or they don’t
🇸🇪 Guide for startups in Sweden - basic stuff
🇩🇪 Guide for startups in Germany - basic stuff
🇫🇷 The Future of Angel Investing in France - solid work
🇨🇭 The Swiss VC Ecosystem - what happened in 2022

Have you produced useful resources for the community? They can be events, reports or tools - send me an email with submissions at drnovac@gmail.com

Long or short on the Brits?

Other notes

🤔 PSA Some people complained about the missing section of my weekly curation of the interesting European deals. That section is part of Monday CET, a separate weekly newsletter covering comprehensive intel we dig through the Euro VC/startup ecosystem.

You can read the last one here (it’s free) and subscribe to get it too from here (yes, you have to be a N9 paying customer). It’s pretty good, I am told.

🇩🇰 Noma pivots. Noma, considered to be the best restaurant in the world, announced at the start of the year that it is ending permanent restaurant service, focusing more on CPG and pop-ups. The restaurant will close for regular service at the end of 2024 and become a full-time food laboratory, developing new dishes and products for its e-commerce operation, Noma Projects, and the dining rooms will be open only for periodic pop-ups.

The restaurant business is very hard and demanding - so stressful that Noma’s founder was actually accused of not treating and paying his employees the right way in the past. This business move means switching from a customer facing operation (which is complicated as is) to a creative one. And probably more lucrative, as you can see below from Noma’s financial statements, the whole effort of running the best restaurant in the world produces less than $5 million a year at very thin margins, if that. (numbers are in Danish crowns, 1 DKK = 6.8 USD)

Question is, will Noma’s brand remain the same under a different model - going to their restaurants is like going to the church, you don’t go there for the food, but to tell your friends that you went there. There’s a long reservation line, and the whole thing creates virality from sharing what you experienced at the location. So Noma, as is, is an experience-not-food-selling business - if that’s gone (not entirely, as they’ll still be running popups), switching to a food-producing one wrapped in an online D2C model will present a very different set of challenges and opportunities. Classic Clayton Christensen disrupt-yourself case, interesting to follow further.

🇩🇪 German entrepreneurs complain that their investors are pushing them to move to US as the American legislation provides better business opportunities (read subsidies) compared to what they get in Europe. Maybe I am missing something but complaining through the media (not cool at all) rather than acting doesn’t make sense, that’s business 101 - you simply go where the money is, waiting for the local government to help you is just a bad European habit of living off from subsidies instead of creating a healthy business model. When you run a startup funded by private investors, you are a businessman working for your shareholders and your job is not to get involved in politics but to take advantage as much as possible from the political context - besides, until the Euro regulators wake up to “the American threat”, the window of opportunity for your company may be gone. Puzzling.

🕸️ Market aggregation, the gaming edition. Remember the 2021 FBA craze from Europe with consultants turned startup founders and raising tons of money for acquiring FBA ops in order to manage them as a holding co? Here’s the same, but for gaming, in US, that is - just raised series A. We’ll see if this picks up in Europe too - Aonic is doing this out of Sweden already btw - as doing games requires a tad higher theory level for consultants willing to get rich over night.

🚄 Eurostar trains are forced to run with empty seats because border police cannot process passports quick enough, despite huge demand for services between London, Paris and Brussels. High demand, limited supply - increased prices for passengers.

🇬🇧 The business world works on nepotism not on meritocracy, the British edition:

Nepotism is a driving force throughout British society, not least the media. There are, however, key differences [between the UK and the US] in the same way that Ricky Gervais’ The Office differs to Steve Carrell’s: It’s subtler, nastier, and arguably more effective in achieving its aims.

🤔 Something smart from Amazon: Amazon announced the launch of RxPass: an add-on to Prime memberships that provides subscribers with access to 50 generic prescription drugs for a $5 monthly fee. It competes with these guys from Dallas, run by Marc Cuban, one of the longest internet entrepreneurs from US (he made his first money by selling broadcast.com to Yahoo in the 2000), and who also owns the Dallas Mavericks NBA franchise.

🇪🇺 Markets in everything A peer-reviewed paper by scientists in Europe found that fertilizer made from human feces and urine is safe to use, and that only extremely tiny quantities of chemicals from medicines or drugs, for example, would get into the food.

🇳🇱 The Dutch did a parking garage under water, just below the Amsterdam Central Station, that fits some 7,000 bikes. Parking is free for the first 24 hours and roughly 1.3 euro per day after that. This one minute time lapse will tell you about it.

Quickies

👏 Is investing in the UX a viable alternative to the VC-driven unsustainable growth? VCs are good at theory.

📈 The Web3 growth stack - link

🛒 Read and learn - the 9 truths about online shoppers.

🚘 We try harder - inside Volkswagen’s big bet on electric vehicles

⌚ Are luxe watches going away? A look into the market of luxe watches.

👋 Precision Neuroscience - co-founded by Benjamin Rapoport, who also co-founded Elon Musk’s Neuralink - is creating a brain implant thinner than a human hair.

🦇 World’s longest wingsuit proximity flight - over Mont Blanc, in France, really cool.

🎶 Generating music from text - this looks pretty neat for the commercial music industry, found via Google’s showing off they’ve got AI too.

Did you find this email useful?

Great, will forward • Good • Meh

Thanks for reading! Please send me your thoughts or comments by hitting reply.

If you would like to sponsor this newsletter, please get in touch. I am bit biased, but Sunday CET is a great way to reach investors and founders from Europe.

If this email was forwarded to you, please subscribe, it’s free!

Created every Sunday by @drnovac of Nordic 9 with weekly notes and observations from the European startup ecosystem.

You have received this email as you signed up at Sunday CET or are a Nordic 9 registered user.

Sunday CET