How can startups stand out in the cold winter of the creator economy?

TL;DR Since 99% of creator revenue is accumulated in the top 0.01% of creators, creator economy startups have to find a way to justify a portion of their revenue from it. But it’s not an easy task, not to mention that in this impending bear market, perhaps only a few people will be able to make it.

From 2020 to 2022, during this period, it will be relatively easy to raise seed funding for your startup. All you have to do is tweet this “password” — “I’m building something new in the creator economy” — and $5 million will magically appear in your bank account. Even Series A rounds are generally easy because cross funds are throwing money all over the place.

But before was before, and now is now. Interest rates have gone up! Relative to its multi-million dollar value, Digital Monkey can only sell for 100,000 now! The founders shivered, cried, and threw up looking at the 20x revenue. Venture capitalists are learning what “cash flow” is. It’s really bad out there! I’m not joking, I’m telling you very seriously: Private market capital will be in short supply for some time.

My friends, the winter of the creator economy is coming. The result will be a weakening of the group of creator economies. In the short term, many of the hotter startups will fail. In the long run, tough teams will need to work with the best digital startups to get through this period. And the difference between the two is whether these startups can answer the question: What are you doing to earn revenue?

In the process of researching this article, I spoke with dozens of management teams, over a hundred creators, and the most prominent investors in the creator space. Here, thanks to all those who have given generously.

Now, let’s get back to business: to understand why revenue share is so important, it’s worth taking a deeper look at creators as customers.

small client, small wallet

The good news for the creator economy is that there is a powerful and positive force driving it — more and more people are pursuing a creative life online. A report by Linktree states that the total number of creators is around 200 million. Another Kajabi report puts it at more than 50 million. (This difference is largely dependent on how you distinguish between social media users and “creators”). But anyway, it’s a huge number. On an emotional level, there is a deep sense of satisfaction in helping individuals build their own businesses and pursue their passions.

But as the field develops into 2020, the initial boom has passed, and the negatives of the market have become more apparent. Startups serving creators face multiple challenges around customer concentration, the importance of demand aggregation, and the disproportionately low income of the creator middle class.

99% of creators don’t generate meaningful income: Even the best investors in the world will only have 3 out of 20 companies that actually outperform when it comes to building a venture portfolio. Therefore, this is also considered a high-risk asset class. In contrast, more than 90% of the revenue is accumulated by the top 0.01% of creators. In other words, investing in an early-stage entrepreneur is 10 times more risky than investing in a typical early-stage startup. Note: Yes, there are more nuances to funding creators, but you can get the general idea. There is also a lot of risk in this industry.

We can take Twitch as an example and see what this looks like in practice. In an October 2021 hack, Twitch’s creators’ earnings were leaked to the internet. But the results were shocking:

  • 50% of revenue is generated by the top 1% of streamers 
  • 75% of earning accounts made less than $120 this year 
  • 896,261 accounts made no money at all
  • Only 0.06% earned more than the US median household income of $67,521.
  • A quarter of the total revenue is earned by the top 1000 accounts.

Twitch’s results are not unique. I see a similar dynamic happening in writing (Subtack), adult entertainment (Onlyfans), video (Youtube), etc. In my entire career, I have never seen such extreme power-law effects as in content creation. If a company wants to capture the very top of the market, it’s like finding a needle in a haystack.

You can’t provide what creators want most (demand aggregation): In my own experience as a creator, and in discussions with over 100 creators over the past year, I’ve found that every creator has Same desire: more fans. Finding new followers is the most challenging and exhausting aspect of the job. When a creator starts their new venture, they usually don’t envision their days being filled with marketing. They just want to make stuff! Instead of convincing people to like their stuff.

Unfortunately, in reality, a large part of a creator’s job is finding and converting new fans. Any platform capable of directing new fans to creators has an immediate advantage over any other tool. Conversely, if demand aggregation is most important to creators, then all other tools are secondary. Startups can’t just provide software to help creators and then unilaterally assume they’ll be successful.

Only social giants have made huge efforts to aggregate consumer demand. Youtube’s recommendation algorithm, Twitter’s trending topics, and Facebook’s recommendation page are all Hollywood’s most powerful agents. They determine who wins or dies in a competitive content marketplace. Native discovery is still happening, and fans can be incentivized to share content, but the most effective way to grow a creator’s business is to use a platform like Twitter to grow a large, free audience, and then convert that audience into a product of choice. For creator economy startups to provide similar functionality, they would have to build a full social media platform themselves. If you have the means to disrupt Facebook, then you should probably build the platform and become a billionaire.

In Peter Thiel’s classic book on startups, Zero to One;

“As a good rule of thumb, a patented technology must be at least 10 times better than the closest alternative in some important way to lead to a true monopoly advantage. Any improvement below an order of magnitude is likely to be considered marginal improved, and it’s hard to sell, especially in an already crowded market.” Emphasis

In order for creator economy startups to break the shackles of existing platforms for audience acquisition, they have to build something better, but it’s really, really hard to do!

To make the role of creator economy startups more challenging, many social platforms are starting to build a more robust creator tool. Platforms like Facebook are taking the industry seriously, offering enhanced profiles and new monetization options. Twitter has acquired a direct Substack competitor. The software offered by these companies may not be as good as the professional software that startups can offer, but creators will forgive them if these platforms bring in new fans for them.

Low Yield and High Price Sensitivity: In a perfect world, customers would have unlimited budgets and be desensitized to price. The creators are the exact opposite. Especially with that 99% long tail, every dollar counts. According to the Linktree survey I mentioned earlier, only 12% of full-time creators make more than $50,000 a year, and 46% of the same group make less than $1,000 a year. Even more brutally, 66% see it as a side hustle. For technology providers, the average user doesn’t have that much money at their disposal. So you’re stuck with prices close to Spotify and then Salesforce.

When you mix all these factors together, you get two distinct customer characteristics in the creator economy:

**Power Creators (1%):**Anyone who earns more than $70,000 per year from their content. It can be solo or have a team. They may be multi-platform, with different distribution channels and different monetization products. On their own or with a small team, they can scale all the way to making millions.

Long-tail amateurs (99%): The other 99% of creators in the world who make very little and don’t have much cash to spend.

So we have these two different creator types for creator economy startups to choose from, but their average contract value is very different. But no matter who you choose, you can’t build a traditional SaaS business because the annual contract value (ACV) is low. And in most charts, the ACV of the creator economy tool doesn’t even get registered on the list.

How can startups stand out in the cold winter of the creator economy?

How can startups stand out in the cold winter of the creator economy?

Because creators have low incomes and are extremely price-sensitive, creator economic tools can only charge consumers for subscriptions. This is not a good phenomenon.

form of money

No matter what kind of creator a startup serves, the interesting thing is that creators make money in the same way: advertising and gatekeeping.

Contrary to popular belief, advertising is a beautiful thing! They make content available for free, increasing the spread of creators. They’re massive — whether you have 100 subscribers or a million subscribers, there’s always an ad product that’s right for you. Ads form a virtuous flywheel where your content can have the most traffic, attract new followers, and generate healthy revenue.

That being said, there are plenty of downsides as well. Advertising can introduce perverse incentives to expand the top of the funnel at all costs, even if they have negative externalities. (Just look at your Fox News.) Although to be fair, these same incentives also exist in the subscription model. The advertising model is also in a painful cycle. Advertising is a great business when the economy is booming. What about when we’re in a bear market? like now? it’s not true.

Good creators produce tons of free content to grow their audience while tiering higher-paying products. Usually, these products are what I call “access control”. By paying for portions of their content, community, or courses, they can upsell existing followers, dramatically increasing their average revenue per user. Subscriptions can also allow creators to monetize a smaller user base if the value of their product is high enough.

Still, these numbers are small. A well-run ad agency will typically see around $10-20 per user per year. When it comes to subscriptions, the best content stores have conversion rates around 5-10%.

All of these numbers vary based on your audience, but they’re useful as an example: it’s hard. The media industry has always been an absolutely ruthless place to build a company in. As a creator, you can’t change the power of the industry, you can only change the competitive positioning. Startups serving these creators must be highly aware that they don’t have as many customers as they would like, and they won’t be able to pay enough subscription fees to build a traditional SaaS startup.

The right to earn revenue share

On an average day in the stock market, the typical high-growth SaaS stock trades at 20 times sales. If your goal is to build a $5 billion creator economy business, you’re going to need about $250 million in ARR to get there. Again, when you’re selling to the customers we described above, it’s not an easy task.

I’m not going to try to map out all the potential software applications a creator exploits, as the context is highly media/scale/etc. But broadly speaking, a creator is an SMB media business. Anything a small media store needs, a creator needs too. In this regard, the creator economy tool is no different from any other SMB SaaS offering at different levels. They will be affected by the same market dynamics: high churn, low average contract value, and smaller TAM.

If put 10 years ago, this will make it difficult for the field to succeed on the scale of venture capital. But now, the rules of the game are different. SMB SaaS has proven to be effective, especially for businesses like Toast, as they can leverage payments to capture a percentage of their revenue. Capturing a percentage of revenue makes the industry not only viable, but also lucrative for creator economy startups. It frees startups from subscription constraints. It allows companies to serve the long tail of amateur creators and scale with established creators.

Currently, the company that is best at leveraging revenue sharing is Youtube. They keep 45% of ad revenue for themselves and give the other 55% to creators. While many creators think this percentage is too high, it’s actually the best in the industry because the company plays the dual role of aggregator – aggregating demand and ad supply. in other words. Youtube provides creators with real, indispensable value. The power of Youtube is so powerful that on other platforms like Instagram and TikTok, creators often try to port their audiences from these other platforms to Youtube.

In smaller startups, the current trend is to mix various different software modules and add some very mild demand aggregation, and then take a percentage of the revenue. However, to survive the coming funding winter and expand their runway, creator economy startups need to find a way to increase their conversion rates. This situation can be achieved in various ways:

Host spicer content: OnlyFans currently has a best-in-class conversion rate of 20%. Because they are willing to take on a higher administrative burden by navigating banking regulations and content moderation, most of their income comes from adult entertainment. Similarly, Substack currently earns about $2.5 million from anti-vax communications on its platform, with a 10% conversion rate. By being willing to accept riskier content, platforms unleash a monopoly power that allows them to increase their revenue share.

For Target solopreneurs: No one starts their creator career saying, “Man, I just can’t wait to hire an accountant.” Even if you’re not doing anything at all to help creators find clients, But the more administrative work you handle, the more likely you are to successfully claim a revenue share. As a company helping others get started, you gain a certain level of trust. I often get this comment when I ask the authors of Substack why they don’t use a cheaper service. “They took care of all the little things for me and I was with them from the beginning.

Build a micro-SaaS attention wedge: Startups can look for a place to gather creator fans, either through a community platform or through a Link-in-Bio tool, for a nominal fee. (Link-in-Bio ranges from charging $75 in ARR to charging $5k for community platforms) In any case, once they gather enough attention at these fan gathering points, the software acts as a monetized meta A meta-layer in which other products can be sold. Whether it’s merchandise, courses, or content subscriptions, creator startups can get a piece of the action.

Become a Creative Partner: One of the most interesting ways to get a revenue share is to become a Creative Partner. By helping creators create and sell their work, companies can earn a significant portion of their revenue. One of the most famous pioneers of this approach was the Creative Artists Agency in 1989, which packaged films such as Jurassic Park. Agents help script writers come up with ideas, pair them with directors and producers, and then package the films and sell them to major studios. A more modern iteration is the cohort-based course platform Maven, which helps potential tutors develop their courses while asking for a percentage of their income.

Become a Financial Partner: The banking and financing needs of creators are very unique. They’ll be flooded with 1099 papers, need to make cash advances for special projects, and struggle to get a mortgage. Because their finances are so unpredictable, traditional agencies and software tools are not suited to handle their needs. But this issue is critical, and creators are more willing to share the revenue with you if you can fix it for them. Companies like Karat, Stir, and Spotter have a variety of views on the issue.

Form an Ad Network: If the major social platforms monopolize consumer demand, it is possible for companies to find opportunities on the other side by building ad inventory for creators to use. Conversion rates for ad sales vary from 5-30% depending on media and revenue volume. Startups like Pearpop are helping everyone meet this need.

As a last-ditch effort to scale, if a startup can’t get a decent revenue share from creators, they can move their different tiers of software specifically for creators to a higher-level platform for businesses in general. Creator-led Growth (patent pending for the term) allows companies to tap into a wider range of use cases with the software it originally offered to creators. Startups like Circle started out with software products for creators, but have since expanded into more traditional businesses.

Epilogue

I admit, there was a bit of pessimism at the beginning of this post, but hopefully this list of options saves it! I am very bullish on the creator economy. The wave of people using the internet to fund their passions isn’t going away. For those exceptional companies that have learned how to be partners and not just rent extractors, there is a huge opportunity ahead of them.

To survive the creator economy winter, startups must scale their revenue alongside their customers so they can appropriately serve capable creators. Otherwise, you can only be a micro-SMB SaaS, which is really not a good business model. But for those who do it well, revenue sharing can be used to build an incredible company while helping thousands of people build their own digital media empires.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-can-startups-stand-out-in-the-cold-winter-of-the-creator-economy/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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