Bristlemoon on Business Breakdowns Podcast - Match Group

Further thoughts following the podcast release

Business Breakdowns podcast

Bristlemoon Capital Founder, George Hadjia, recently appeared on the Business Breakdowns podcast to discuss Match Group (Nasdaq: MTCH). The discussion, accessible via the link below, covered off on the history of Match, the online dating category, how Match makes money, as well as opportunities and threats.

https://www.joincolossus.com/episodes/73711642/hadjia-match-group-swipe-right?tab=shownotes

The big takeaway from the discussion, in our view, is that dating apps are harder to scale up than many appreciate. We felt it was worthwhile to provide some follow up details around the history of Hinge as a way to illustrate these dating app scaling challenges.

If you were to look at Hinge today, it’s a mid-30s% top-line grower and that revenue growth is accelerating (it is likely to hit a 50%+ Q4 revenue growth exit rate this year). As such, it’s easy to take a revisionist lens to the history of an app like Hinge when you see how strongly it’s growing today, and to assume that it has always been in growth mode. However, Hinge’s success was by no means a fait accompli, and people often forget that if they were not acquired by Match, their issues were very likely to have been existential.

The Hinge reboot

Hinge back in 2016 undertook a reboot of its app. The decision to rebuild the Hinge app from scratch followed on from a 2015 Vanity Fair article titled Tinder and the Dawn of the “Dating Apocalypse”[1]. The article had sensationalist overtones, but the core message had truth to it: many people were using dating apps such as Tinder for hookups; callous, untoward behavior, particularly from males, was rife throughout dating apps. Hinge’s founder, Justin McLeod did not want Hinge to be just another hookup app, so he embarked on a bold and risky rebuild of the app.

McLeod fired half of Hinge’s staff and then the people that were left went away for 9 months and built Hinge 2.0 from the ground up, designing a user experience that was more relationship-focused. The original incarnation of Hinge was still downloadable, but all maintenance was pulled. Its Apple App Store rating plummeted to 1.5 stars as a result. McLeod went all in on Hinge 2.0. The problem is that the reboot did not go as planned.

When the new version of Hinge was launched, it got off to a slow start and Hinge was burning through a ton of money. They had lost the initial momentum while they were building the new app, and their issues were compounded by an unpopular $7 per month hard paywall for all users that was introduced with the revamped app. They promptly had to scrap the paywall, given the user revolt. Here is a crucial point: Hinge launched the mobile version of its app in February 2013, but didn’t start trying to monetize until 2016. That is a long time to go without any form of monetization!

Difficulties in getting funding for dating apps

The problem with dating apps is they have a high initial cash burn. We see this across the entirety of the dating app complex. This is because no one is willing to pay for features unless you reach a level of user liquidity that can translate into value from those paid features in the form of more, or better-quality matches. These are difficult businesses to get funding for and they rank poorly in the eyes of VCs, who have never been too fond of the dating app category. VCs tend to go for companies that have loyal, active, long-term user bases. Dating app user activity is the antithesis of that, with short-term, ephemeral users. Furthermore, there is a paucity of lucrative, right-tail VC monetization events in the dating app space, very much unlike the rest of the consumer internet space or enterprise software.

Hinge struggled to raise institutional money during its initial years but did cobble together $20 million (interestingly Hinge had an unusually large cap table with 115 investors). This was likely a function of VCs observing the phenomenal growth of Tinder at the time, which was closed to external money because it was incubated by IAC, and those VCs using Hinge as a proxy to get exposure to the nascent dating app category. However, if we think back to the Hinge 2.0 launch in 2016, VCs had very much gone cold on dating apps.

The relaunch of Hinge coincided with McLeod looking to raise his Series B from investors. However, VCs snubbed him. As McLeod recounted, “I was begging [VCs]...I was offering valuations that were embarrassingly low… I went everywhere trying to make this deal happen, I talked to everyone”[2].

The relaunch went poorly and churn levels soared. McLeod described Hinge 2.0 as having launched with a “whimper”. In the words of McLeod, the situation was grim: “[It] [l]ooked like the whole thing was going to collapse in the first two months”.

Lessons from Hinge’s early struggles

Nowadays Hinge is clearly an incredible, high growth asset. It is the crown jewel of Match’s dating app portfolio. But bringing up some of that history illustrates that the growth of these dating app businesses is not linear, and they periodically run into challenges. It also highlights the enormous challenges in achieving scale for a dating app. Absent Match Group coming in and acquiring Hinge, there’s a chance that Hinge might not have survived.

McLeod made a telling admission when he recounted Hinge being acquired by Match Group in 2018: “I didn’t really have a choice…In order for us to compete, we needed to raise a lot more money...There was kinda no other option than to find a strategic buyer like Match”[3].

It is worth keeping in mind the tumultuous history of Hinge – both in terms of its struggles with raising capital as well as its near-miss with bankruptcy – when thinking about the risk of a left-of-field app gaining enough scale to threaten Tinder’s dominance. We believe scaled dating apps such as Tinder have assumed a utility-like status which is predicated on the matching mechanism they provide users, which requires a level of scale in order to function properly. This is distinct from other consumer apps which provide entertainment and are more susceptible to competitive threats.

We hope you enjoy the Business Breakdowns podcast and as always, we welcome well-reasoned pushback and opposing thoughts.

Disclaimers / Disclosures

The information contained in this article is not investment advice and is intended only for wholesale investors. All posts by Bristlemoon Capital are for informational purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This document does not contain all of the information that may be required to evaluate an investment in any of the securities featured in the document. We recommend that you obtain independent financial advice before you make investment decisions.

Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.

We make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. To the maximum extent permitted by law, we do not have any liability for any loss or damage suffered or incurred by any person in connection with this document.

Bristlemoon Capital Pty Ltd (ABN: 22 668 652 926) is an Australian Financial Services Licensee (AFSL Number: 552045). 

George Hadjia is associated with Bristlemoon Capital Pty Ltd. Bristlemoon Capital may invest in securities featured in this newsletter from time to time.

---

[1] https://www.vanityfair.com/culture/2015/08/tinder-hook-up-culture-end-of-dating

[2] https://www.npr.org/2021/03/19/979188827/hinge-justin-mcleod?t=1625226837480

[3] https://sifted.eu/articles/hinge-ceo-founder-lessons