The thesis of Patreon

Patreon EC-1 Part 4: Patreon wants to be a massive startup, and these are the steps it has to take to get there

Can Patreon become a powerful, multi-billion-dollar company at the heart of the global media and entertainment industry? It’s founders and investors certainly believe so.

In this Extra Crunch EC-1, I dove into Patreon’s founding story, product, business model, and competition. Now I want to dissect the foundational thesis of where Patreon could unlock massive economic value. If it turns out they got the thesis wrong, tactical and product details won’t save it.

As I see it, Patreon’s thesis includes four hypotheses:

  1. There’s a ton of untapped economic value in getting the mid-tail creator market to adopt membership business models.
  2. Creators will adopt membership business models once they become exposed to the idea.
  3. Creators need a dedicated “membership” service independent of the platforms they use for most of their content distribution and social interaction.
  4. By owning membership, Patreon will be able to expand into providing numerous other products and services to creators.

I agree there is substantial untapped opportunity for mid-tail creators to leverage memberships, that Patreon can secure meaningful market share even amid competition by the largest content distribution platforms, and that being the dominant infrastructure provider for creator memberships is a highly strategic position from which to expand into numerous other products and services for creators. Where I’m more cautious is regarding the pace by which creators will adopt this and the percent of mid-tail creators for which this is a good fit. Let’s dig in.

Reading time for this article is about 11 minutes. Feature illustration by Bryce Durbin / TechCrunch.

1. There’s a lot of untapped economic value in getting the mid-tail creator market to adopt membership business models.

Creators produce media content for others to consume online and are independent (and not employees) of large media companies. The “mid-tail” creator is an individual who has a dedicated base of “true fans” probably numbering in the hundreds or low thousands. From my research, there are no good metrics for how many such creators exist.

Patreon wants to be the platform for mid-tail creators, which it defines as creators who can earn $1,000-500,000 per month through its platform. Currently, the platform has about 133,000 creators earning at least $1.00 but only 4,300 of them fit into that category. Those 4,300 drive most of the $500 million in payments it expects to process this year, however. Conte said of the number of creators who could fit in this range, “it’s hundreds and hundreds of thousands of those creators, and we have a very small proportion of them now.”

These creators are underserved small businesses

Whether they’re sole proprietors hustling for side income or full-time production teams shooting videos in a studio, mid-tier creators are businesses. However, as I explained in my analysis of Patreon’s product, these are customers not typically thought of as small businesses, and even if they are, they’re usually seen as too complicated, low ROI, and volatile. These mid-tail creators are not being chased by top talent managers, agents, record labels, etc. because they don’t command enough earning potential (in the eyes of the traditional industry). Creators are entrepreneurs, but unlike other types of small businesses, they need to stay focused on creating their product and interacting with fans, not managing a business.

Without time to handle business, these mid-tail creators are then left with advertising as a reasonably simple revenue model. Having thousands of passionate fans, though, may generate enough ad revenue to cover lunch, if they’re lucky. Plus, they often are not even creating content to appeal to a massive global audience anyway. Instead, they want to provide a lot of value to a more targeted audience than advertising allows.

If you remove advertising from the picture, then every potential revenue stream comes back to the same subgroup of fans: superfans who care enough that they will buy merch, event tickets, albums, art prints, and basically anything that a creator produces. The superfan-creator dynamic isn’t just transactional, like buying a pair of shoes from a store with good reviews. Rather, it’s quite emotional. Superfans don’t just value the final output, but also the process of creation and the person doing it. They want access to the whole thing.

If a product targeted mid-tail creators, however, it could address their particular needs, and this is where Patreon steps in. SVP of Product Wyatt Jenkins described the challenge of serving this customer: “There’s a tension between capitalism and art that exists in the world that we can’t untangle, we just have to do our best. So all the language in all the product is like teaching artists business. That’s the challenge we face everyday.”

Membership unlocks value

A membership business model is like a subscription to a community. Membership is about fans paying dues (on a recurring basis) to be part of a creator’s inner circle, receiving a mix of perks like exclusive content, access to discussion groups, members-only merchandise, first dibs on event tickets, video calls with the creator, etc. There can be different tiers of membership that provide better perks. Beyond the tangible benefits, it also provides deeper emotional value to fans: being (formally) part of a tribe.

Membership is a business model that can be distinctly applied to the circumstances of content creators. Creators make for natural recurring revenue businesses, since loyal fans want to both continuously consume content and also want an ongoing relationship with the creator. People will pay to be your friend. It is not about trying to change who is popular or how popular they are — it’s about helping them make more money through deeper engagement with their core fans. It makes the mid-tail of creators fatter.

Patreon talks about membership as a fit for the 1-3% of a creator’s online fan base most passionate about them. For some niche creators, it could be much higher.

“It’s not in our mission to change the fundamental economics…there are some creators who are popular and some who aren’t…we can’t change that…we can give less popular creators the best tools to better monetize their audience though and sustain themselves as a creator.” – Jack Conte

On the flip side for creators, membership offers reliable, recurring revenue. They can choose to go full-time, make capital expenditures and hire employees based on forecasted income. As a result, mid-tail creators who are part-time or full-time but scraping by can evolve into a landscape of stable small and mid-size businesses managing customer churn and happiness. Especially if there are tools to understand those tactics and take action without having technical savvy or traditional business experience.

This is an expanding market

Like with the broader growth in self-employed people / independent contractors, interest in a business path as a full-time creator appears to be growing. The adoption of membership among a substantial subset of mid-tail creators will cause more people to pursue this path as others see their success. The fact that you can be a self-employed creator with stable income (without being super famous) will increasingly make this a credible option.

There are macroeconomic risks though. A recession could cut consumer spending on memberships and make it harder to build a creator business. In addition, I expect a pullback in the market in terms of ad revenue, sponsorships, and fandom around social media influencers who are primarily personalities and fashion & lifestyle purveyors. However, these types of creators don’t fit the membership business model anyway (except the not-safe-for-work variety) because their stardom tends to come from a base of lightly-engaged fans.

2. Creators will adopt membership business models once they become more exposed to the idea.

Membership is a new business model for most people in media and entertainment. Particularly outside the publishing sector, creators aren’t used to having a subscription for their individual content. Many are uncomfortable asking their fans to pay for their content: Jenkins talked about this as a challenge for the company. He noted that part of Patreon’s role is to give creators the confidence that their superfans value them enough to join a paid membership.

Even if a creator understands the membership concept and is excited about it, there’s still a big mental leap to make. Since it’s pioneering a new market, Patreon is essentially asking its customers to start a new business, with all the time commitment that entails. Membership brings recurring revenue but comes with recurring commitment. If a creator launches a membership through Patreon or its white-label product Memberful and promotes it to their fans, they could damage those fan relationships by failing to meet their expectations.

The executives I interviewed at Patreon mentioned numerous times that most customer acquisition occurs organically as a result of one creator seeing another’s success on Patreon. Once creators understand the membership concept and see the social proof that it is working for their peers, they sign up too. Thus, Patreon is trying to accelerate the adoption of membership models by educating creators on the concept.

In my estimation, there will be at least two more years of gradual market growth before membership is a widely-known business strategy among creators and talent managers. In part, I say this based on anecdotal evidence from my conversations with a range of creators and entertainment business people; even among the more tech-savvy ones who pay attention to VC-backed startups like Patreon, they tend not to be entirely clear on how such membership businesses operate. I also say this based on Patreon’s creator and revenue growth rate — strong but also fairly stable and linear.

Financial pressures will also push more creators this direction. Revenue from advertising is weakening for many creators, social media platforms can change algorithms on a dime, and the public’s backlash against the influence of those platforms in society will force more creators to seek out alternative revenue models. We certainly saw this at the enterprise-level with publishing companies collectively rushing to launch subscription tiers over the last couple years.

3. Creators need a dedicated membership infrastructure that is independent of the platforms they use for most of their content distribution and social interaction.

If there is a big market, untapped opportunity in membership models, and creator interest to adopt them, the question then is where will creators turn to launch their membership businesses? This is a huge and critical topic in and of itself, so I spun it out into a separate competitive analysis.

4. By owning membership, Patreon will be able to expand into providing numerous other products and services to creators.

If membership gains mainstream traction among mid-tail creators and if Patreon (both through its Patreon platform and Memberful subsidiary) secures dominant market share as this market expands, it will be in a powerful position to offer ancillary services that could be quite lucrative. As Jack Conte told me, “Membership is Patreon’s Act 1. There’s so much more we can do to fund the creative class. You’re gonna need more than just membership. Over the next 10 years, there’s going to be a lot more that we do.”

What Patreon would be able to do is become “the creator company”. By anchoring in a CRM of fan relationships and payment processing infrastructure, it could expand into every other component of a creator’s business. There are three obvious expansions it can make: more tech products, talent services, and financial services, and one it should not: moving up to enterprise.

Expansion: Tech products

As the infrastructure for a creator’s membership business, Patreon can gradually become the bedrock for all of a creator’s business activities that tie to fan relationships. To borrow a term from enterprise VCs, it becomes the system of record for creators. This opens the door to a Patreon App Store, with third-party developers using the Patreon API to build a wide range of fan engagement, analytics, and category-specific features.

The more a creator uses the Patreon API, the more valuable it becomes to run any other activities through it as well, a potentially powerful network effect. As certain third-party tools gain popularity among Patreon’s creators, it may then acquire the company or launch an in-house replacement to bring it fully into the fold.

Patreon is already developing a product for creators to design, order, and deliver merch as part of their patron benefit tiers without having to touch any physical goods (partner manufacturing, logistics, and fulfillment companies use the API to coordinate everything). In terms of a traditional e-commerce store for fans to buy merch, it would make sense for creators to use one that is built off the Patreon API as well so consumer data feeds back into the same CRM. Expect more such “apps” to come in the near future.

Expansion: Talent Services

The more data that Patreon can analyze from a creator’s CRM, and the more insights it learns from all of its creators, the more Patreon will be able to provide in-depth guidance on business strategy beyond what outside advisors could do. The highest tier of creator service could be category-specific guidance (i.e. ongoing support from someone with expertise in the music industry or in the podcasting industry) that overlaps with traditional talent management.

This human guidance, plus automated software tools, could displace the role talent managers and business managers normally serve for rising creators (as career and financial advisors, respectively). Heck, Patreon could use its data to recommend which creators would benefit from collaboration, which is the work an agent would normally do. Patreon wouldn’t replace the role traditional managers and agents play as business partners to the very largest creators, but it may represent a middleweight, scaled solution for the much large number of successful creators below them.

Expansion: Financial Services

Lastly, Patreon could launch whole new business lines that solve its creators’ other pain points. Two business lines that Jack Conte has specifically mentioned to me and others as part of his long-term vision are business loans and health insurance.

Both are frustrating for independent content creators to get. Banks don’t understand the dynamics of being a small content creator, especially in terms of irregular income. With the data Patreon has on a creator’s membership business, though, it could underwrite loans with deep insight into an applicant, as well as support them during rough patches or when they need to make a big upfront investment.

As more creators become independent and use Patreon, there is also a potential opportunity to market health insurance, much as the Freelancers Union markets a health benefit to its members.

Bad Expansion: Moving up to enterprise

The wrong direction to expand would be to focus on providing infrastructure to large media companies. Both Conte and Jenkins mentioned this strategy as a long-term possibility, albeit not the focus on any current brainstorms or investments. Jenkins noted that within the context of the company’s three-year product roadmap, “We’re really well-designed for a creator with a staff of 5 to 50. But beyond that, we’re not even gonna try.”

A serious move into enterprise media infrastructure would be a distraction from the opportunity to be “the creator company.” Enterprise media companies are a different animal from individual and small-business creators, with much more technical complexity a more crowded market of existing options.

Building solutions for enterprises would be an implicit admission that Patreon determined this thesis about untapped opportunity in serving creators proved false. There is an enormous company to be built if the thesis plays out and Patreon is the dominant player. Chasing corporate media IT budgets is not the path to do so.

Toward the next great Silicon Valley company?

I see a lot of untapped value in the mid-tail of creators that membership businesses can release. I also expect them to become much more commonplace among creators within the next few years, albeit never adopted by the majority of them (I don’t think Conte expects that either).

It can’t be discounted though that the surge in subscription and membership models across media and entertainment over the last few years has been happening during a strong economy, and it’s unclear how consumer spending on content and social media perks will be affected by a recession. Plus, consumer fatigue of subscriptions is a real possibility and will only intensify as more creators go down this route.

But membership is the wedge that establishes Patreon as the system of record among creators and gives it a competitive advantage in rolling out a whole range of other products for them beyond memberships. From CRM and finance tools to loans and talent management, Patreon could provide the comprehensive, plug-and-play infrastructure for creators so the only thing they have to focus on in their business is creating their content and talking to fans. If anything, it needs to speed up its grand ambitions and get the flywheel of the creator market spinning faster.


Patreon EC-1 Table of Contents

Also check out other EC-1s on Extra Crunch.