I Spit Hot Fire

I do not really watch Shark Tank, but two recent episodes struck my interest. The first was the episode with Singtrix, which has a connection to my time with RedOctane and Guitar Hero. The other was about Coffee Meets Bagel, the January 9th episode (thanks to Kevin Tung Nguyen for sharing the episode) that you can watch below:

Coffee Meets Bagel (CMB) relates because of my work at FriendsPlus, which we sold pre-launch to Noi.vn, Vietnam’s largest dating service in 2013. Like CMB, FriendsPlus focused on creating a non-meat market dating environment focused on the needs of female users, encouraging offline meets between users who explicitly opted in to each other. Some commentary on the episode and CMB:

• The team should have been prepared for questions about user numbers. By deflecting the question multiple times, one wonders if they have given different numbers to different people and thus could not say publicly on television what the current numbers were (they would not want to be shown lying), or if CMB is simply at the bottom of the range given (100-500K users). As Cuban implies, there is a big difference between 100K and 500K users, especially considering that CMB has been around for close to 3 years (more on that below) – it suggests limited market or non-compelling and non-naturally sustainable growth.
• The team mentions that CMB was invested in by a Match co-founder. That person is Peng Ong, who I actually know. Tinder is invested in by Match, the firm. CMB launched in April 2012, 5 months before Tinder, but Tinder is estimated to have 50 million users today. The team cites Match’s 800M in revenue as a sign of their own potential. That’s the same logic that says you should automatically advertise on Facebook because it has 1 Billion users. Yes, there is some superficial logic there, but you need to delve a bit deeper.
• The Sharks are right in that CMB can easily be copied – look at the popular Noonswoon from Thailand.
• CMB’s revenue and users are a bit alarming. I discuss it over the next points.
• Last year, CMB generated $87K in revenue. If that is $0.50 per user on average, this would imply 170K users. This is reasonable for this type of product and follows what the team said. I don’t know how long the average user stays with the product. If they actually have more than 170K users, revenue is actually less than $0.50 per user. Remember this $0.50 figure for later.
• This year, CMB expects to make $1M USD, but expects to lose $1M, which means costs were $2M USD. Current user acquisition is $0.30 per user.
• CMB expects to break even at $10M in revenue next year, from 4M users. They expect to spend 3-4M (let’s assume it’s 4M) in to bring on those new 4M users. That is $1 per user. They expect $2.50 per user in revenue, but did not include CMB’s existing users in that revenue figure. This leads me to believe that CMB user lifetime with the service is not particularly long (1 year or less) or that the number of current users and the revenue generated from them is not significant enough to include. This implies the lower user figure in the given 100-500K user range. Increased user acquisition costs suggests this product does not spread virally, something about it does not compel others to talk about it, or you are trying too hard to bring someone who may not be the right fit for your product. If this is the case, the projected gain in average revenue per user (ARPU) for these kinds of users is also a concern.
• How did CMB estimate $2.50 per user per year moving forward? CMB is going to jump from $0.50 to $2.50 (500%) in 1 year?  How does adding users generate more money per user? Since the revenue is from digital currency / microtransactions, does having more users make the product more sticky? If so, this implies the business is not sustainable now. If that is true, and focusing on this niche is not sustainable, what does this imply about the value the product is creating for its current users? Does having more users actually mean more date / chat frequency which means I need to buy more microtransactions? Again, this is not a meat market like Tinder in which you go on to browse (consume) through people – for Tinder, you need a ton of users. For CMB, you are getting one match per day carefully selected for you. Are there more types of transactions that CMB will be processing in the future that will generate new forms of revenue?
• Let’s compare CMB to a Facebook type of product. Facebook generates more revenue by adding more business models. Example, Facebook could sell different types of ad products, and can charge more money with an increased user base (market power) increasing the efficiency of those ads. It can also take a share of revenue that is generated within the platform (apps, games), or sell emoticons. Thus, more users could lead to more revenue, but you also need to add more models for those users, it’s not automatic. This concerns me about CMB – it currently just sells digital currency.
• Why is there such a high burn rate (company spending)? With $2M in expenses, this is over $150K in burn per month. You might want to look at CMB’s jobs page to find out where the money is going: https://coffeemeetsbagel.com/jobs/. From my experience: company trips costs a sh*tload of money. Based on LinkedIn, I found about 15 full-time employees at the company. Let’s say on average, each employee costs the company $100,000 each per year (this is low when you include office space, benefits, etc.). The founders mentioned they each make 100K, which for the Bay Area, is low. Based on CMB’s $1M revenue, and $1M in losses figure, however, the team is suggesting they spend 133K per employee per year, which is possible. (This doesn’t include marketing, which at .30 per user at 170K users, would only be about 50K and can be ignored for now). I know that the Bay Area is a different beast with employee expectations, but in my opinion, startups in need of cash need to learn how to conserve cash better.
• CMB will break even at $10M in revenue and 4M+ users. With $4M going in advertising, where does the other $6M go? If you stick to the $133K per employee figure, the company would need to grow to 45 people. Perhaps some people are getting raises. Infrastructure should not be a particularly significant cost yet. I don’t think you can have 45 people in a co-working space either. If the cost goes to $150K per employee, that is still 40 employees. If the team can cut the fancy office, parties, trips and focus on profitability, I expect there is a good amount of fat that can be cut. (One of RedOctane’s first offices was a big warehouse with no air conditioning in Sunnyvale – no frills worked out for them)
• I wonder if CMB’s quoted revenues include the 30% share that is given to Google Play and iTunes for microtransactions. Otherwise, there is no cost of goods (COGS).
• Why does CMB need to grow to be profitable? This, along with CMB’s slow user growth after nearly 3 years troubles me. I could understand the growth in the sense it’s not a meat market app. It’s for people who want quality, real relevance over gross quantity. But why can’t it be profitable now? This makes me question the revenue model. Is CMB going against its core by going to mass-market advertising? If the app is not for everyone, it should be positioned accordingly. I don’t see how growth rescues them long term.
• So what should CMB do? I would consider changing to a premium / subscription model to get revenue from more (higher % of users pay, but less overall users) users at higher rates and focus on that smaller niche audience to reach profitability. Do people pay for love? Yes, as long as it is provides real value. CMB seems to be providing that.
• The Mark Cuban $30M offer: I don’t think he is actually making the offer, he is saying “what if”, to which the proper response to a hypothetical is of course no. If you say yes, you have publicly given a limit to what your company is worth (the team has suggested a $10M valuation with $500K for 5%) for no reason. You would never want to create the sense you do not believe in your product to preposterous levels. If it were a legit offer, I believe they should have taken it. 3X valuation is nothing to joke at, as much as the team may claim to look at Match’s $800M in revenue or Tinder’s billions in valuation. The team suggested CMB is a cash hungry business intent on growth. CMB received $2.8M in venture capital last May, which would not cover its marketing budget for this next year. Yet, its is only asking for 500K from Shark Tank. This leads me to believe CMB is mainly on Shark Tank for the PR and don’t want to give up very much equity, has another round coming, or does not intend to go with its stated marketing plan at all – it would not have the money for it. If it needs to grow massively to become profitable, CMB has no other option than to take the buyout offer.