An Equity deep dive on Patreon

The popular TechCrunch podcast Equity this week launched a new series called Equity Dive, wherein a host interviews the writer of the latest edition of the Extra Crunch EC-1.

If you’ve ever wanted to know everything there is to know about Patreon, the platform that connects creators with fans and their wallets, then this is the show for you. TechCrunch Silicon Valley editor Connie Loizos speaks with Eric Peckham who spent hours upon hours meeting with the Patreon team to learn its origin story and the ins and outs of its business practices to get the company to where it is today.

Read a deep dive of Patreon on Extra Crunch

As Eric says:

The way to think about how Patreon has evolved is I see it in kind of three stages, which was this initial crowd funding platform, and then evolving beyond that to try and be a destination platform for consumers where there would be great content that you just go to Patreon to find and you go to discover creators, kind of a marketplace model. They moved away from that. That was somewhat of a gradual shift and essentially the decision was it’s not good to be stuck in this game of trying to be yet another destination platform for consumers competing with YouTube and Instagram and every single media site out there. Really the opportunity and mission underlies our work is about helping creators and enabling all these independent creators to sustain themselves and to build thriving businesses.

They shifted, they now describe themselves as a SaaS company actually, which is very different from framing yourself as kind of a consumer destination. The long and short of it is they see this opportunity, which is a growing market of independent creators around the world who are building fan bases, and for that particular type of SMB they want to provide essentially the full suite of tools and services that they need to run their businesses.

For access to the full transcription, become a member of Extra Crunch. Learn more and try it for free. 

Connie Loizos: Hi, I’m Connie Loizos and I’d like to welcome you to our first Equity Dive. Once a month we’re going to be dedicating an entire episode to a deep dive into the life of one company. This month I’m joined by Eric Peckham, who has reported extensively on the crowd funding membership platform Patreon. Hi Eric.

Eric Peckham: Hey Connie, excited to be here for the first Equity Dive.

Connie Loizos: Same, so Eric you and I ran into each other first in Berlin but we don’t know each other very well. I’d love to hear more about you. You’re based in LA, and from what I understand you are a media industry analyst. Is that correct?

Eric Peckham: Yes, so I cover through both my own newsletter Monetizing Media, the happenings of the global media and entertainment industry. It’s kind of a very business minded lens on media and entertainment.

Connie Loizos: Well I read your extensive coverage on Patreon and it was really impressive, and I wondered considering how much you wrote, is this sort of a long interest of yours this company or how did you decide to settle on this for your first deep dive for TechCrunch?

Eric Peckham: Yes, it was an exciting process digging into this. We made a short list of exciting companies, a lot of unicorn companies or late stage startups we thought were about to become unicorns, and Patreon jumped out for a number of reasons. One is as someone who runs his own newsletter I have had subscribers to that newsletter suggest creating a Patreon. I’ve looked into it before, so I had a little bit of a creator perspective of just wanting to better understand Patreon and other options in the market. I think from a bigger picture, more of a Silicon Valley perspective, Patreon’s a really fascinating company. They’ve raised over $100 million from top PC firms like Index, CRV, they’re the dominant player in this space they’re targeting, but it’s kind of them versus just the big social media platforms. There isn’t the startup that’s comparable in size to it and it’s really trying to own this whole territory of independent content creators, surveying them with different business tools or services.

Connie Loizos: It is really interesting to think the David and Goliath story involves a $100 million venture backed startup versus, as you say, I know these big players Facebook, YouTube. Let’s start at the beginning, so you decided on Patreon for reasons that I can certainly understand now. How did you set about pitching them on this idea? Because obviously you were going to need a lot of access to them, a lot of their time.

Eric Peckham: We actually initially got connected through a buddy of mine, Dustin Dolginow, who had invested in Patreon when he was at Accomplice Ventures out of Boston. He put Jack and I in touch, Jack Conte’s a CEO of Patreon. They were excited about the idea of this and open to giving me a lot of access to Jack and to a number of the executives to do interviews and really get a deep understanding of the company.

Connie Loizos: What are their offices like, if you don’t mind me asking? It’s a creative platform, do they have sort of the hidden library or the hidden bar that you access through a library?

Eric Peckham: Yes, I mean they have a great space that’s relatively new for them. They’re growing incredibly quickly, and so it’s a space where half of the floor is empty waiting for more people to be hired, but the culture of Patreon stems directly from the personality of Jack and his co-founder Sam.

Connie Loizos: Jack himself was a music major at Stanford, is that correct?

Eric Peckham: Yes, so Jack has a fascinating story. He and his co-founder Sam, they were roommates at Stanford in undergrad. Sam was a CS student and focused on traditional startup Silicon Valley path, and Jack Conte was just a musician who had this incredible belief in what was happening with the internet to open access to both content creation and distribution, being able to connect with your fans directly through social media and build a following. After he graduated he ended up starting this band Pomplamoose with his now wife. They gained a bunch of traction online and decided to use the internet as their platform to make money and engage their fans.

Connie Loizos: I think it’s so interesting that these two people who are so different came together. The musician and the computer engineer, so now Sam Yam, which I learned entirely from your report, had worked with Sam Altman I guess at his company Loopt and then was starting his own startup. This is really interesting to me. You say that he was on the cusp of getting this thing going, he had cued up some coverage in TechCrunch, and Jack Conte reaches out to him and says, “I have this completely separate idea, let me tell you about it.” Sam Yam kind of drops everything and says, “I think your idea is better than mine, let’s do this together.” Is that sort of accurate?

Eric Peckham: Yes, I mean Sam and we got some great videos of Sam and Jack talking about different parts of their founding story together, that’s part of the report on TechCrunch. People should definitely check that out. What happened was Jack got really into creating these music videos as a way to put out his music and engage his fans on YouTube, and had this vision where he was going to rebuild a replica of the Millennium Falcon set from Star Wars. He was going to have dancing robots, but it was going to be really expensive. This brought up the idea of how can I get more of my fans to help chip in and fund this with me? Not just for this one video, which maybe you could use Kickstarter for, but for every time I’m doing one of these videos for a song.

He ended up in his notebook mapping out this idea for what Patreon could look like and then reached out to Sam who was his friend from college who he knew was in this space. They end up meeting. Sam is there just to be nice and hopefully give some feedback. Jack’s asking if he should sign an NDA or whatever else, he’s new to this whole startup thing. They end up having this conversation about the opportunity that gets Sam so animated that night he starts building Patreon. What’s incredible is that same day he actually got featured in TechCrunch as the announcement of the startup he had been working on our spot.

Patreon founders Sam Yam (left) and Jack Conte (right)

Connie Loizos: How many years ago was this?

Eric Peckham: They met in March 2013. In May they launched the platform publicly. Jack and his girlfriend, and a former roommate of his, were the only artists on the platform originally. He had reached out to over 40 creators thinking they’d all sign on and be excited and every single one said no. They launched with essentially just him and very quickly other people started signing up. Then they got a ton of interest as they went out to raise a seed round, but actually ended up being kind of a pretty hotly competitive round.

Connie Loizos: I know the model has changed sort of considerably since those early days, but what did it look like then? Was it literally a donate button, here’s my content, if you want to chip in that’s fantastic but that’s all that I’m asking?

Eric Peckham: It started as a very straightforward crowd funding platform with the difference being that you are entering some amount of money to every piece of content that particular creator publishes. In Jack’s case it was for every music video he posts you are signing on to give $1, $3, or $5, and then you can set a cap. Yes, if your creator releases something every single day you don’t end up paying $500.

Connie Loizos: What seemed to get traction at first? I know now it’s sort of all over the map. Were they musical artists or film makers?

Eric Peckham: Yes, so the core early audience for Patreon was YouTubers and their fans. Jack was a musician but his following was really on YouTube. Like I mentioned, he creates great music videos that go with his songs. He had reached out to other YouTubers and the folks who immediately saw what was happening were other YouTubers who followed him on YouTube. They said, “Wow, look how much money this guy is signing on.” He very quickly had signed on thousands of dollars in support per video. It generated a lot of interest from other YouTubers and gradually expanded beyond just that. Jack saw from an early point that any sort of artist online can make use of but YouTube really was the starting grounds.

Connie Loizos: I also wondered how they think about content and the evolution of their “creator base.” As you said, sort of originally it was more artists perhaps. Now anything goes. What are their policies in terms of assuring that content that’s maybe less appetizing in some way stays off the platform? Obviously that’s been a huge issue for its bigger competitors Facebook, YouTube, etc.

Eric Peckham: This has been top of mind for their team. They’ve had a number of incidents that have generated some press as they’ve tried to draw the right line around this. I’d say there’s kind of two areas where they run into this question of whether content should be allowed on Patreon or whether the funding of a certain creator should be allowed on Patreon. One is more in terms of nudity, pornography, not safe for work content. Now actually a very large portion of Patreon creators and the data I saw it seemed like about 23% of those getting paid at least $1 or more are in this not safe for work category they have. They prohibit pornography, but in their scope of how they define art whether it’s erotic novels or nude photography is allowed on the platform.

The other area that’s been a bit more top of the news has been around political commentary and hate speech. There have been a few different instances here where they’ve had creators who are posting content either on Patreon or elsewhere, but they get funded through Patreon, that a lot of people would consider hate speech. That’s where they’ve run into this line of where … On one hand, Jack is someone who’s very supportive of free speech. He’s critical to art and expression and this whole mission that they focus on, but at the same time doesn’t want Patreon to become a hotbed for hateful rather than productive. The removal of a particular creator in December triggered a whole subset of creators to start boycotting the platform, including some who were some of the most top funded creators.

Connie Loizos: That’s really interesting, but again I guess that speaks to its size. Beyond a certain point that’s probably not possible to do. How big is Patreon? How many people are on its platform? You said that 23% of them are producing things that are maybe not safe for work. What percent of them are making meaningful dollars?

Eric Peckham: It’s fascinating to look at the breakdown of users on Patreon, both in terms of patrons and the creators. The core customer that Patreon now focuses on, and this is the key KPI that they really drill down internally now, is the number of creators who make $1,000 a month or more and the overall amount of money that those people make. A very small subset of the overall number of people making some money. The biggest question for Patreon is what’s the real market size here in terms of creators who can build a following and are business savvy enough to be able to operate a membership business as part of what they do that’s generating $1,000 a month or more? It’s certainly a small subset of the people who try to create content online and would like that to be their full-time job.

In their case right now that core group is only a few thousand people. They see a huge market. Are there 100,000 creators out there who will run membership businesses of $1,000 a month or more? Maybe, I don’t think it’s easy to get all of them. What was fascinating to see was the churn rate of creators on the platform is kind of very high for people who have just joined and are only getting $1 or $5 a month. It’s not working out for them, typically these are people who haven’t already built an audience. But the other side of it is for creators who make $500 a month or more, the churn rate is actually below 1% annually, which is pretty incredible for a company that focuses on what are essentially small businesses.

Connie Loizos: These numbers are all really interesting. How does that compare sort of historically? I mean if you looked at the numbers a year ago is this much more, is it kind of close to where it was? I mean is this a fast growing company or is this sort of steady as she goes?

Eric Peckham: It’s definitely a fast growing company. What we’re not seeing is doubling of users either on the patron side or the creator side year over year. This is also a company that’s been around for six or so years now. It did have those years early on. What’s interesting is on the creator side, although the payment’s going through the platform, the amounts of money being made almost doubled year over year. Last year the number of creators overall didn’t grow as dramatically as it had before. What that’s a signal of is essentially getting better at articulating who Patreon is for and who it’s not for. Right, if you’re a creator who doesn’t have any fan base already online then you shouldn’t start a Patreon account assuming that random people are going to across and fund you. I think they’ve gotten better at targeting the key customer segment that’s the best fit for this.

Image via Getty Images / dima_sidelnikov

Connie Loizos: The best creators have already established an audience, they’re bringing them over there. What is the appeal? They’re on YouTube, they’re on Facebook, but these are ad driven platforms. Patreon is instead a subscription model?

Eric Peckham: Yes, I mean I think you’re seeing this through all of media right now. I mean TechCrunch is a great example. We’re seeing a shift of all types of media organizations who not want to be entirely dependent on ad revenue, and looking to create a subscription where their core fans are paying a monthly amount. That just gives them more resources to work with and then create better content and better experiences, but also creates a stability of revenue coming in where they can actually plan for the next few months out in terms of hiring people or making bigger investments in content they want to create without this concern about how much ad markets might fluctuate.

The big selling point of Patreon for creators is here’s an opportunity, now that you’ve built an audience online, to really engage your core fan base, which they found is typically 1% to 3% of an online fan base, and pull those people into a deeper relationship both in terms of the amount of engagement you have with them but also in terms of better monetizing them. Right, your super fans are happy to spend more money in order for more content from you or more access. When you’re on Facebook and Twitter and Instagram you’re not tapping that super fan base for the value they’re willing to give.

There’s a lot of untapped economic opportunity here, and if you can get a group of your core fans to sign on to monthly memberships, whether they’re giving $5 each, $1 each, what you end up with is the stable income of hundreds of dollars, or thousands of dollars, or in some cases tens of thousands of dollars a month from your core fans. That’s really powerful for enabling on one hand creators to go full-time who haven’t been able to, for full-time creators to go from a one man show to a small business where they actually hire help and start investing in bigger projects. It’s really this vision of how can you go from just the guy in the garage who’s creating great music or creating art to a thriving small business.

Connie Loizos: I think it’s interesting that the super fans are not sort of higher in terms of percentages, 1% to 3% seems sort of low, but in terms of the strategy it’s really interesting and you’re right, we are seeing this evolution. We’re seeing it in media, but I’m seeing it in a lot of other startups and so many other verticals. I just had done a story on a tutoring company that was a marketplace and now it’s enabling its educator customers to run their own businesses with its software so they can create their own sites, their own businesses, become their own entrepreneurs. We also saw this with Bird, the e-scooter company, which more recently decided to let people run their own fleets of Bird scooters. Patreon, the way I’ve understood it based on your writing, is it used to be this marketplace connecting fans and creators, but now it’s kind of selling its software suite. Is that right?

Eric Peckham: The way to think about how Patreon has evolved is I see it in kind of three stages, which was this initial crowd funding platform, and then evolving beyond that to try and be a destination platform for consumers where there would be great content that you just go to Patreon to find and you go to discover creators, kind of a marketplace model. They moved away from that. That was somewhat of a gradual shift and essentially the decision was it’s not good to be stuck in this game of trying to be yet another destination platform for consumers competing with YouTube and Instagram and every single media site out there. Really the opportunity and mission underlies our work is about helping creators and enabling all these independent creators to sustain themselves and to build thriving businesses.

They shifted, they now describe themselves as a SaaS company actually, which is very different from framing yourself as kind of a consumer destination. The long and short of it is they see this opportunity, which is a growing market of independent creators around the world who are building fan bases, and for that particular type of SMB they want to provide essentially the full suite of tools and services that they need to run their businesses. A good comparison is if you start, whether it’s a tech startup or if you start a pizza shop who you find success, as you have more money and can hire people, what you do is basically step away from having to create the product yourself or having to interface with customers directly and you move up into more of a management role.

Creators can’t do that. The whole point is that they’re the ones creating the content and they’re the ones engaging with fans. They need to be able to stay on the creation part as they scale the business operations. They’re less involved in day to day business operations and looking for tools that make that really easy for them.

Connie Loizos: Obviously these tools must differ depending on who the creator is. For example, you mentioned that you have a newsletter. I have one as well. There are tools out there that help newsletter authors manage their audiences. What would a Patreon give you and what would you have to pay Patreon versus a traditional email service provider, for example?

Eric Peckham: The way to think about Patreon is it’s trying to be the core nucleus of the creators businesses, which essentially means your CRM of your super fans, payment processing, financial analytics to understand how much money you’re making, the taxes you need to pay to all different jurisdictions, analytics on layer on top of the CRM to understand who your fans are, guidance that’s proactive. Hey these fans started supporting you three months ago, you should probably send them something like this so they don’t churn. It’s a particular set of tools designed for creators. Then part of this shift and strategy they’re making, specifically not trying to be the destination, but instead to be kind of what all the other sites that a creator uses plugs into. They have a number of big API partnerships they’re rolling out and looking to really open up their API a lot more so there’s kind of a whole app store off of Patreon.

MailChimp is a great example. They plug into MailChimp so that creators send messages, they get analytics through MailChimp, and that all comes back into their Patrons here around. There are a lot of different types of creators and one of the things I brought up in talking about the competitive environment, they do face competition from category-specific startups. I think Substack is a great example as a startup focused on newsletter writers, and they’re building tools specific to newsletter writers. On one hand there is some competition there. They see a world where most creators now are multi-dimensional. They may have a newsletter but they’re also creating videos or amassing an online fan base, they’re doing multiple things, and so you need a bit of an all-purpose solution. Also he talks about being open to, as some of these category-specific startups gain traction, either building specific tools to compete with them or just acquiring them.

Connie Loizos: How do they charge for these software packages? I mean is it based on how many integrations there are, how many users, how much revenue they’re producing each month?

Eric Peckham: This is another interesting element to the company. It is very different from what you think when you hear a SAAS company. They actually don’t charge any money in terms of cash that you pay on a monthly basis. The way that they operate is essentially a commission model, which they see as the most incentive aligned way to work. It has been that they take 5% of the revenue that comes in for any creator, and then on top of that they add payment processing fees, which for just last week had been standardized as an additional 5%. Essentially they take 10% of the money that creators bring in, which if you compare it to just a simple payment processor, is a lot. If you compare it to the amount of money that YouTube, for example, takes either in ad revenue or through their new membership product that competes with Patreon, which are at 40% to 30% respectively, it’s very low.

Facebook creator app

Connie Loizos: Of course those platforms are huge and you talk about them, you looked at the competition and you noted that Facebook, for example, has been building out dedicated functionality for its creators, including an app that unifies their Facebook comments, their Instagram comments, Messenger chats. There’s an analytics dashboard. You said they were “ominously” also testing out monetization strategies. YouTube’s also been more aggressively courting creators with money making schemes including channel memberships. When you look out on the future of the company how big a threat are these giants?

Eric Peckham: I think they are potentially very big threats. The other side of that coin is these are all companies that you have a track record of acquiring companies as well, so there could be acquirers. To our point earlier about this rush across all of media to not just be dependent on ads and to generate revenue directly from fans, the social platforms are recognizing the shift and trying to capture some of that. They want to support creators monetizing their fans. A common model is kind of tipping in live streams. It’s especially popular and lucrative in the gaming world, e-sports. YouTube and Facebook have both rolled out membership products, which are to back a creator you like for a set amount a month. In exchange you get access to a special discussion groups, you get emojis on your comments that signify you’re a backer or some of the offerings are different.

What both of them haven’t yet done is truly exclusive content like posting videos that only your members can see. In both cases, I don’t think this is a massive new commitment by the companies to move into this space and try and push out Patreon. They both seem to be a bit tepid testing this out. There’s a lot of restrictions, they’re only allowing a few creators to use it initially, it’s a very early days, and I think they’re trying to figure out whether it fits into the context of their businesses. I mean these are the biggest ad generating companies in the world and that’s their bread and butter. In terms of who Facebook cares about or who Google and YouTube cares about, they’re first priority, their core customer is advertisers. Second to that is the end user because that’s who the advertisers care about. The tertiary level is creators because they post things that attract the end users.

The arguments that Patreon would make is they’re inherently going to be product decision or business decisions where the fact that creators are low on the priority list result in products that just aren’t as compelling or well fit for the creators. For example, neither YouTube or Facebook will give you the email addresses of the people who subscribe to you and support you every month, probably never will.

Connie Loizos: It sounds also like Facebook and YouTube probably aren’t quite sure how big a market is there. Is it worth trading on some of those ad relationships to explore those further, and it’s kind of good news bad news for Patreon in that sense because if it proves that it’s a much bigger market, and especially the SAAS business than those companies realized, you could sort of see them paying more attention to it. If not that’s just basically bad news for Patreon. You talk about this company as a pre-IPO company. This is a big shift. How long do you think we need to give the company to see if it is going to kind of gain traction and if this is sort of a company that should be going public?

Eric Peckham: Yes one of my takeaways here was I do think they’ve built a solid business. There are a whole number of ways to start monetizing more. They acquired last summer this company Memberful, which is essentially the white label, more customized version of Patreon. Folks like Ben Thompson at Stratechery use it. It’s on your website, the customers don’t know that it’s Memberful, they just see your custom domain and the payment processing, etc. Now that they have this big base of creators, big base of patrons, they have incredibly low churn so people are very loyal once they join, starting to tap that base for more money and they’re starting to do that.

In terms of looking towards an IPO I think they’re still a few years away from that being an option. Typically companies have over $100 million in revenue or close to $200 million. They still have a little ways to grow. They have to prove out these new revenue streams. I do think there is a path where they continue to be an independent company and eventually go public.

Connie Loizos: In terms of their financing, you said they’ve raised $100 million. Do you think they need to raise more before this exit of one-way, one form or another?

Eric Peckham: Definitely, they still have a ways to go before they’re profitable and they’re still very focused market share. They want to completely dominate this market of independent creators where for any creator out there who’s operating on their own they’re using Patreon in one way or another in terms of tools and services. They see themselves growing beyond just this core membership model and the tools around it. In the future they could provide business loans to content creators or even small business health insurance because they understand the particular needs of creators, they have more data than anyone else on their businesses and whether they’re thriving or not. Provide very particular types of services at a really affordable rate. There’s going to be a lot more money they need to raise. They’re out raising the Series D now, I believe. I think there’s two directions here. Keep staying independent and eventually is able to go public, or it gets scooped up by one of a number of other companies. I think there are several companies for which that would be really strategic.

Connie Loizos: Well Eric we are out of time. It was so nice talking to you and learning so much more about the company. I loved your reports. I hope that Extra Crunch readers, if they haven’t already checked it out, will take a much harder look, it’s worth it.

Eric Peckham: Absolutely, I’m very happy to be on this. We have a couple more reports in this fashion coming out. Another writer here at TechCrunch, Greg Kumparak, is about to start publishing a great report he’s done on Niantic, and I’m also working on another one now, actually working on two, one on Unity the gaming engine, and another on Kobalt, which is a really exciting music startup backed by Google Ventures.

Connie Loizos: I’m excited to see those. I know Greg had a blast doing the reporting. Thank you again Eric.

Eric Peckham: Thank you.