Revenue fell from $25M to $8M—so he raised $75M in crowdfunding and ignored VCs. | with Dan Novaes, Co-Founder & CEO of Mode Mobile

0:00We had made over a million bucks, right? In two months. Wow. And you're what, like 23 and your co-founder is like 18? 18. Yeah, he's in his freshman week. So I was like, hey, I think you should drop out and move to the US and we should do this like full time. It basically in my mind, I was like, this is not a sustainable business because I had gotten a cease and desist from Facebook that was like, hey, we're going to sue you. You're violating our terms because we did have to use their API. Eventually the app was taken down. It was out there. We made a good amount of money on it, but it was something that wasn't one of these sustainable, like long-term businesses.

0:28I think we did about just under$100 ,000 that year, about$100 ,000. And by 2022, we had done $25 million, right? So we had this like 32 ,481 % growth in revenue over that three-year period, which ultimately ranked us the number one fastest growing software company on the Deloitte Fast 500. That's product market fit. Product market fit. Product market fit. I called it the product market fit question. Product market fit. Product market fit. Product market fit. Product market fit.

0:56Dan Novaes: I mean, the name of the show is Product Market Fit. Do you think the Product Market Fit show has Product Market Fit? Because if you do, then there's something you just have to do. You have to take out your phone. You have to leave the show five stars. It lets us reach more founders. It lets us get better guests. You have a very different business than really. I mean, everybody's business is unique, but a lot of them, frankly, especially in BC land, they start sounding the same. And yours is not one of those. I mean, you pay people to use their phone. I mean, fundamentally, that's what you do. Sometimes it's games, maybe it's news, maybe it's music, a bunch of different things.

1:30We're going to get into all that and how that works because on the face level, people might have a hard time understanding how you make a business, paying people to use their phone, but you do fundamentally, and you've raised$100 million, not through VC, not through angels, but all through crowdfunding, which is an absurd number for crowdfunding. And you've grown a business into the tens of millions in revenue doing that. So we're going to touch on all of that, but let's start at the place that we always start, which is product market fit. When did you feel like you'd found true product market fit?

1:57Yeah, so to set the context for this, so like a confinder and I have been working with each other for 14 years. I actually met him when he was 17 on Fiverr. He was on Fiverr and then I was actually 23 and just graduated college the year prior. So he built me an app for 85 bucks and you know, long story short, he built that app, paid like 10K. Sounds like he was underpricing himself. That was not, there's no AI at that point. That was his work. Definitely. I was his first ever project. He went from like reading Objective-C books to socially building this app. I used to own this website called fratstars.com.

2:28So to give you context, it was like a music website before like Spotify. Anyways, like that's our product fit moment, our product market fit moment. I mean, somewhat it was product market fit. I was like, wow, like we made 10K off of this app. And then I was like, hey, you should take a gap year and move to Chicago. And he was from the UK at the time. And he did. It's wild. Like he actually, his parents let him do that. And so we kind of just like tried to bang out a bunch of different apps. We were building an app builder at the time. Then we're using our own app builder to essentially build apps.

2:58And didn't really hit product market fit for any of those like significantly. The week that he was supposed to go back to school, because effectively it was like, okay, we tried, didn't really work out. And this was when, by the way, what year? This is 2013. And he's like, I got to go back to school, but I'm down to work on this part time. And I'm like, okay, cool. That week I was like, hey, I come up with this other app idea. and maybe like six months earlier or so, Facebook had just acquired Instagram, right? And Instagram was starting to get big, like beyond just the photos and stuff like that.

3:28But like everyone was downloading Instagram and posting their Insta, this and that. Anyways, I had this idea that I was like, what do people care about on Instagram? At the time, it was like likes. Like they just want to get on likes. They want to get up to the Explore page. And as a growth hacker, like mindset, I was like, what if you created an exchange system where you can post a picture? And then if you essentially like that person's picture, you would get a coin. And if you follow that person, you would get two coins. And then if you didn't want to do any of that, you could just pay for coins.

3:55And we called it InstaLiker. And he basically built this entire app in a week. We launched it into the store. And we had this great viral loop where if you posted on your Instagram, and this is when the algorithm was like undisturbed and no one was doing this, right? You would get like extra coins. Dude, we posted this. And I remember, I'll never forget because like we, it ended up going live, I think at like 11 p.m. Eastern, which was like 8 p.m. Pacific. And then the app store closes at like, you know, midnight, right? And I remember waking up in New York the next day because I was there for like a trip.

4:29And I remember seeing like 700 bucks in in-app purchase revenue. And I was like, that seems like an error because this app just came out. And then that whole day, I'm like looking at the charts and we've went from like literally no man's land to sixth, like the sixth highest downloaded app. And at the time, this was before subscriptions even was introduced in the store. And so we actually had it as a paid app initially, and then we moved it to free. But yeah, we went all the way to the sixth in the store. And then I started looking at the grossing charts. And the grossing, we were like 150. And then by the second day, when I woke up the next morning, which I'll don't tell you the number, we were 67th.

5:08I'll not forget because it was like us, Wall Street Journal. And I think it was like Plenty of Fish, right? Which was a big dating app at the time. Yeah, huge. After Apple fees, it was 13 grand. So I had 30 % to that. So it was 18K, right? And I was like, what the hell happened, right? And then it just kept doing that over and over again for days and weeks. Who's the funder here? Somebody would come in and say, I want people to like my picture and they would put money down or? Yeah, so basically, again, going back to, it's actually, if you actually think about the current business model of Mode.

5:39Yeah, you can see the origin for sure in there. You see the connection, the five. So some people don't have money or they just don't want to spend for whatever reason, but they're willing to do it and take an action and willing to do something for this incentive. And so the incentive was, if you don't want to pay, you can just like someone else's photo and or you can follow them, right? And at the time, the Instagram algorithm wasn't that smart. It was good with bots like fake accounts, but these were real accounts. So real people were liking other real people's photos. So all the bot filters didn't work.

6:09And so it basically, we were able to get to anyone to the explore page. And once you get to the explore page, and there's this organic uplift that you get and you could basically gain tens of thousands, hundreds of thousands of likes and then that translates to tens of thousands of followers. And so people were just spending hundreds of dollars a day. I didn't even know what RLTV was because this was before like RevenueCat and MixedPack. I mean, maybe it wasn't, but at least it was before we had the insight to even think about things. And if you liked or followed, you got coins and then you could use those coins to get people to like your own pictures.

6:38To promote your photos, exactly. Just an exchange system. This is going on for like two months, right? they'd like, we had made over a million bucks, right? In two months. Wow. You and your what? Like 23 and your co-founder's like 18? 18. Yeah, he's in his freshman week. Imagine being in freshman week of college. So I was like, hey, I think you should drop out and move to the US and we should do this like full time. And then he was like, if you, because what was our big problem? He didn't have a college degree. So he couldn't get the H-1B visa. At that time, it was easier to get that visa. But that was like kind of like, the only way that we could get him into the US was like an O1A visa, which is basically people with extraordinary ability.

7:17The problem is like bootstrap companies can't really apply for that. It's like, I mean, you can once you're like at scale, but not when you're just like you and your friend on an app, even if you're making good money. So he's like, if you could raise a venture around the attorneys, like, because we had looked into it, I'll drop out. And so that's what we did. I was like, okay, leave it with me. And I had this family office analyst reached out to me. He was like, hey, like we're looking, we just raised a fund. We're looking at investing in, you know, Chicago startups. at the time we were based in Chicago.

7:44And I was like, yeah, well, we're making almost a million dollars a month. So the terms would have to make sense. But we ended up meeting with them. They were cool. And they effectively invested a million and a half dollars at the time at a$10 million pre-money valuation. We were able to get Mark Cuban as an advisor at the time because I had gone to Indiana University and I had a few businesses that I started there. Well, in high school, then in college. And I got connected. And so then we had Cuban. We had this investment. And my co-founder dropped out, right? And we were able to get him a visa and he moved to the US like a year later.

8:17About like four to five months in, right? We'd be making, I can't remember the exact number, but it was probably like two, three million bucks off of this app. You had like no costs. Yeah, pretty much no cost because it was all organic. So one day we were like, I think we were trying to apply to Y Combinator for another idea, to be honest, because basically in my mind, I was like, this is not a sustainable business because I had gotten a cease and desist from Facebook that was like, hey, we're going to sue you because you're violating our terms because we did have to use their API. And so it was kind of like the situation where it's like this catch-22, where I was like, okay, how do I do this without their API?

8:50You could use the web API, but you couldn't use that, but then they would block that, and it was game of cat and mouse, right? Eventually, the app was taken down. It was out there. We made a good amount of money on it, but it was something that wasn't one of these sustainable, like long-term businesses. And so we kind of went into this idea of like running other types of apps and just using that same type of methodology. But that app started everything, right? and we'd been working together for 14 years, had like little kind of micro hits along the way. Ultimately, until we started Mode almost was like seven years later as the first time we generated revenue with Mode.

9:21But yeah, it's like basically a startup that never died, you know, and it was a journey. But that was definitely our first, that's like when I knew true product market fit. I'm curious, like those people that invested, like the investors, they're part of this company as well, or were those like different entities along the way? Till this day, my board is, and we have independents, but I have one investor board member and it's the same investor that backed us 14 years ago. The mind of a growth hacker, a growth marketer, whatever you want to, like, it's just so different, right? It just like goes and we'll talk about mode and what you do, like, but it's so at the essence of, it's like Instagram, you know, like people want likes, people want followers, just get them likes, get them followers and then you just put it on the app store and it worked.

10:03And I'm not saying if you did that, it will work every single time. There's probably some serendipity that goes into it, but it's like, how do you just get at the thing that people really want and not, you know, the stuff around it. Like, we'll help you make your picture nicer. We'll help you craft this caption. That doesn't necessarily get me likes, but if I could pay somebody to put likes, I'm guaranteeing that you'll get what you want. People make decisions with Ocean, right? We actually recently had Nikita Beer as an advisor to help us with one of our apps. And he was telling a story, like in this other podcast I was listening to, and he asked him about it.

10:33But before he created, I can't remember which one was first, if it was Gas or TBH, but whichever one was first, he was like, there was this app called like Saraha or something. It was all in Arabic. I don't know if you remember this, but like I would just peruse the app stores and see what was trendy. And I remember him explaining this at the time and he has seen this like app called Saraha or something and it was like all in Arabic and it was the number one highest downloaded app in the entire app store, right? And that's pretty wild if you think about it. Like we're talking about ahead of Instagram, Facebook, Snapchat, all this stuff.

11:02He basically was like, he understood the viral loop of it. And if this app, which is in Arabic, it's not even in English, is the number one app in the entire store in the United States. There was clearly a product market figure. So then he was like, hey, I'm going to make this for teenagers. And he crushed it and sold the first one to Facebook and then rebuilt the same app again a few years later and then sold it to Discord. And obviously probably one of the best product growth people in the world. So I remember I had a similar kind of way of thinking is like I would look at what was trending on App Store.

11:29And at the time, it was like these like hashtag apps because people would put all these hashtags so that you could get in the feed. And essentially, that's how we came up with the idea of InstaLake which was like, people want Instagram likes. They will do whatever it takes to get Instagram likes and they have no idea how to get it. Because people like, I don't know back then, but like, I remember people asking, yo, I just posted on Instagram. Like, will you like the photo? Like people were saying things like that. And I was like, the fact that you have to say that, which is embarrassing if someone said that today, it's wild, right?

11:57And so clearly there's a market there. And so anyways, that is the first time I've ever launched something. And there's been a few times in my life where I feel, where you could feel the product market fit. Sometimes you think it's going to hit product, maker, fit. You're sure. And then it doesn't. And then you're like, sure. But I would assume, not having had an experience like that, but having talked to a lot of people who've had, like once you have an experience that's that binary, you'll never settle for anything else. Like if you launch something and you don't get that, I'm not saying day one, maybe tweak some things.

12:23But I'm curious, do you just shut it down like pretty quickly? You're like, that's the bar. I mean, why would I push a boulder up a hill if I know what true PMF looks like? I think that's a great question. I think that there's like, Like, it's actually probably been probably one of the questions I've asked myself the most. I think there's levels to it. Actually, that's the best way I can describe it, right? Like, that was, like, insane. And it's so much velocity that everything's breaking and you're just trying to fix it. And, like, that happens sometimes. But the problem on the other end is that sometimes these things are short-lived.

12:52And that was my problem, right? Like, that app was, like, great. We probably could have made tens of millions of dollars instead of just single-digit millions of dollars. But it did set a foundation to a bunch of other stuff. But I think that's the big difference of like a Telegram or a Facebook or something. I mean, that type of product market fit where it's self-sustaining forever. Product market fit is possible. And there's many good million dollar apps out there, multi-million dollar apps, even like$10 million apps. They're kind of stuck at some point in time. And I think there's aspects of even like when I think about our businesses and apps that we buy, like I had this issue with our app, right?

13:25Because the Mode Earn app, basically paying people on their phone, it works really great. But at some point in time, the cost of user acquisition, the payback period goes too far into the future where the unit economics no longer make sense for the core business. So you either have to develop really great channel partners that can distribute that product or secondly, be willing to basically grow at all costs. And that's sometimes works. Like you look at Uber or look at Airbnb and stuff, but sometimes it doesn't work. Right. And look at the companies that Benny Spoons is going out and buying right now, like Airtable or something like that.

13:58And so I think like you could build a great business, but there are limitations to a lot of businesses. And I think that that's actually kind of what actually got us into this business model, which is like, hey, there's a lot of product market fit out there. Effectively, the products that we're buying, we're outsourcing product market fit. There's no incentive structure. People want these apps. If you add an incentive structure, you can put like gas on the on something that's already working. And then you can grow it to some degree, right? Maybe we can't grow it like 5x. But if you can grow to some degree and extract more value, that's great.

14:28and we're excited about that. But yeah, I think that's like a constant thing. It's rare though that you see that. I think the next time we saw that was for our crowdfund is where we saw product market fit and you just know, like you feel it and it happens and then you can dial it in and iterate. But I think every founder should ask themselves, is this a self-sustainable thing that's going to be around forever? Or is this one of these like, take as much as you can and then invest in it into something else, which is also a problem. That was our other problem of why we only made a few million dollars.

14:58as opposed to tens of millions of dollars. Because in my mind, I was having that constant battle internally, which is like, hey, this isn't sustainable and I need to find something else that is. But then I wouldn't focus on the thing that actually was making all that cash. And I was focusing on the thing that, you know, maybe would make way more, but I wasn't proven. And we had a lot of flops. And so if I can go back, I probably would have like tried to write it out to the absolute max degree that I possibly could. Because there are some things that we could have done, I think, to have the longevity of it a bit further and then use those funds accordingly, you know, at that size.

15:31So anyway, that was a very long-winded answer, but it kind of gives you context of like the way we think about it. Maybe a good place to segue. Tell me about the beginning of Mode. Yeah, so beginning of Mode also was a journey of so many pivots, dude. It's like the pivots of the pivots. And the thesis of Mode, before it started as an incentive-based app of paying people, was actually a music aggregation app. We had come to the thesis that after launching a ton of apps, that people didn't want more apps. It's like, there's too many apps. And at the time, it was like, can we aggregate and create a super app?

16:03And this is when we started seeing the stuff that was happening in WeChat in China. And I was like, hey, I think that's going to happen here. We should focus on an app that basically brings together all the media services into one place. And so we built an app that did that. One of the things that we realized is like, one, and see, this is like a theme that unfortunately took me too long to realize it, but it happens, is anytime you build on top of someone else's platform, you are unsafe. And so Instagram being the perfect example for the Instaliker. And then with this music app, we had integrated the APIs of like Spotify, SoundCloud, like all these music services and SoundCloud one day shut us off.

16:39And then so basically we didn't have enough product market fit from the users using that product. And on top of that, we don't even have the full service potentially because they could shut us off at any time. And the people that were using our service at the time, it was because the APIs didn't have ads in them. It was super random. It was like a small time where audio ads didn't go through the YouTube, didn't go through SoundCloud, didn't go through those others. So you effectively could provide ad-free streaming across all services in a singular app. People like that. But the moment that that started changing, we saw the writing on the wall.

17:09So we started interviewing the users that were using this product. We're like, hey, why don't you pay for these services? And then what we found is like, these people just didn't have money, right? For whatever reason, like they didn't want to spend the money, but they did have time. And we had one feature that we actually owned, which was a radio service. It was kind of like tune in. style radio that we were aggregating. And we're like, would you listen to this if we paid you? And they're like, yes, I would focus all of my energy on earning that if we paid you to listen to music. And then that was like, oh, that's really interesting.

17:37And then so we just put like a, I don't know if you remember how like Robin Hood and at the time there was an app called like Mailbox back in the day. And basically it was like a friend referral system and you can get early access. So we just created a referral system that was like sign up to get paid to play music. And if you invited people, you would get earlier access. within two weeks we had 300 ,000 people that had organically signed up for that and that's very similar to the InstaLiker funnel of just telling people and that stuff worked really well back then you have to change the game every time because these referral systems break sometimes but that's how we got into that and then we launched that and people were using it it was going wild getting tens of thousands Who would be paying on the other side?

18:18Somebody who made a song would want to play or ads, you just play ads and they would pay for that? Yeah, the initial model was to play ads And then we realized it is extremely hard to make money off background usage. Music is a very difficult business in general. And so that's how we actually got into other things that people could do. I'm like, well, what if they earn a little bit with music and then they could boost it with games or they could boost it with shopping or news and stuff. And that's how we got into all these other verticals. And then we noticed like a much deeper product market fit with Android in particular.

18:47A lot more budget conscious people on Android than on iOS. And the ecosystem was way more open. and so then we focused all of our energy on Android and eventually came to the realization that we were building an operating system, really, you know, an urn OS and a phone. The phone eventually came off this crazy idea and we built an urn phone, an actual phone that paid you as you used it. And there was a lot of demand for that. So anyways, that was the multiple kind of iteration to kind of get to the current business model and I can give you the ups and downs of that as well, you know, that we've learned.

19:16Yeah, I'm curious. I mean, at least on the early side, I mean, at some point things just start to work and then you're more like tweaking levers and optimizing things and making things better, getting the first$300 ,000 was a huge other, let's say, product market fit moment than finding out that ads for music, because it makes sense. I mean, you put a player on your phone, you leave the room, like the advertiser understands that to some degree. And so they're like, you know, the CPM you're going to pay, I assume that just, you know, it's just tough to make the math work. Yeah. What's the next thing that you decide, okay, music, kind of a floor, will it pay people for this thing?

19:48Like, what's that next thing? Yeah, the next thing was like, It was more about, we can make a lot of, with like games in particular. And one of the, another big unlock that we had on at the time was actually on something we could do on Android that we couldn't do on iOS. And it was lock screen. And so if you think about your phone, the average person unlocks their phone 70 times to 80 times a day. And so we were like, oh, like you cannot do this with Apple. Like the system doesn't allow you to, I mean, there's a very hacky way to do it now, but back then there was not. And Android, you could basically have a lock screen music player.

20:21And so we could show advertising on there as an example and then reward that habit. And that was something that was like per user at the time. Those were the good old days. It was like generating like 20, 30 sets a day. Like, you know, and if you think about that at a million users, it starts to really scale. This is an advertiser paying you to put their, let's say, logo or whatever on the lock screen of a user's phone? Yeah, it could be programmatic ads. It could be, you know, because the user just cares about the music. Like they don't, it's like they're just seeing a display. I mean, think about your phone lock screen, right?

20:53So instead of it being an image, it's like, you know, there might be an advert there or something of that nature. And you're getting paid for that too. So that started working in games, started working really well. You know, offers started working really well. Offers actually started crushing in 2021. And so, and to give you context, so first year revenue of Mode in 2019, of what ultimately became Mode at the time was called Current, right? It was a rewards app. But then Current, the financial bank came out and then we had this like name thing. It was confusing. So we ended up changing the name to Mode.

21:22And basically, I think we did about just under$100 ,000 that year, about$100 ,000. And by 2022, we had done 25 million, right? So we had this like 32 ,481 % growth in revenue over that three-year period, which ultimately ranked us the number one fastest growing software company on the Deloitte Fast 500. We only lost to a Bill Gates-backed COVID vaccine company. I'm sure everybody looking at that list is like, what is this? What do you mean? It was wild, right? And it was great for our company, but here's where things took a shift. During COVID, money became very cheap, right? And a lot of digital startups did very well.

22:00We started seeing this crazy appetite for financial services and crypto in our offers. That was a thing that allowed people to basically, hey, go download Robinhood or go download Coinbase. And effectively, you'll get 10 bucks in free Bitcoin for doing that. Their VCs are throwing money hand over fist in these neobanks. Everyone's going public, money's cheap, like whatever. And what's happening is we're getting all these crypto companies, neobanks, all this stuff, and they're advertising our services. We're sending users into their ecosystem and our revenues are skyrocketing right at the same time.

22:32Well, after Q1 of 2022, it was our best quarter. Like Q1 of 2022, like we actually, I think, did over$10 million in revenue. and then in April. How many people, by the way, at this point? Like what number of employees do you need for that kind of business? We had like, at that time we had about 110. So sizable. And did you need that? I mean, this is a question. I mean, I know you're going to start with just a tangent. Could you have done like 20 people? Like, is that possible? I think 20 would have been difficult, but I definitely could have done 50.

22:59Dan Novaes: Right, 30 to 50. But I was, you see, I drank the Kool-Aid myself. You know what I mean? So it's kind of like, at that time, I'm like, oh, we're going to raise a round from the Vision Fund and this and that. Like, you know, and that's what you're focused on. In hindsight, it all looks like, obviously it's not going to work. Like you're this kind of like payer and this. But when you're in that, in the middle of it and shit's going up to the roof and you're talking about Vision Fund, what is the vision that you're like, what is it that you imagine yourself becoming? So basically the thesis was like, look, we're the closest company to make the smartphone career better.

23:30At the time we had launched our earned phone. We got it into Walmart. We got into Best Buy, Target, all these places. And we're like, look, you know, people are spending, and this is actually true, like even till this day, it's like people are spending 40 to 60 hours on their phone every week, right? If you sleep eight hours a day, there are only 112 waking hours left. If you were spending one third to one half of your waking life on this device, where is the money you're going to? It's going to the things that you almost bought, the ads, like, you know, that's why these companies are worth trillions of dollars.

24:00Thesis was, hey, of the 7 billion smartphones out there, the largest percentage are actually for more budget conscious consumers that actually need a little bit of extra money. And this phone could actually be free at this point in time. If you take everything someone does and share that revenue back with them, you can make this like a piece of gig income, right? Of some sort. And so that was the idea is that we are going to make phones for your better and subsidize that entire cost. It's the eighth biggest expense in the household is the phone plan. Oh, it's not just the device. You're talking about the monthly plan?

24:29Yeah, yeah. Because if you think about it, if you're earning$100 a month, that is more than enough to cover your family plan, the phone, etc. And that's a low, that doesn't include savings. You can save way more than that. So it actually extrapolates quite significantly. So that was the thesis. And still is part of our underlying thesis. And so that was the vision. And you're like, growth at all costs kind of mindset as well, because that's what everyone else in the market's doing. And for us, we were like, okay, we kept extending payback periods because we were like, well, we're making so much money off of these companies that are paying us.

25:03it's like so initially started out as three month pay by period then it's like four month pay by period and we're like six months then nine months and eventually 12 months and then in april may of that year the bottom fell out dude and it was like right around so basically terra luna i remember we had nothing to do with terra luna but that crypto you know failed and then one of our largest advertisers was voyager at the time they owed us millions of dollars and they went bankrupt ftx went bankrupt another advertiser aspiration which wasn't even in crypto it was like a neobank went bankrupt. Everyone that was going to go public suddenly couldn't go public because all the VCs are underwater.

25:36And then so we started getting all these clawbacks of people trying to change the terms of what they were going to pay us. And we were basically left holding the back, millions of dollars. And I didn't collect enough money to pay for my 12-month payback period. And I'm only two or three months in. So we had to cut half of our staff. We were in this no-man's land because we were not a Series A or even a Series C company. We have a unique business model that is not kind of like repetitive and kind of pattern recognition that probably VCs are going to see. And on top of that, now I'm maybe was a series B company, is now a declining series B company and all the growth investors are underwater with their portfolio company.

26:14So they're only going to save the best ones, not to mention the ones they've already given money to. So you're literally in no man's land, right? And that was where I had found myself. What kind of runway were you looking at? So by making all those cuts and doing all that and trying to extract whatever type of revenue we could think of to do and kind of also re-stabilize the business. We had maybe like a year and a half, like at best. So it wasn't like, I have three months, but I had like, I think I had about 15 months. We had to rethink the business because revenue concentration is really what killed us, right?

26:48We had a lot of revenue concentration with certain key advertisers and that really hurt our business. So one of the things that we came out with or came up with an idea with was like, hey, how do we pay our users less without having them churn? very difficult. The reason people are here is because they want our money. And so I had this idea. I was like, well, I wonder if we could give them shares just to like, you know, we'll still give them cash, but maybe we can give them shares to kind of make it or sweeten the deal. And, you know, we won't lose as many users. And the only way to do that legally was what I eventually found out was crowdfunding, right?

27:17And in order to do that, we'd have to get audited financials and we could launch like a reg CF, which allows you to raise 5 million bucks. And I was like, I'm a good consumer marketer. I understand how user acquisition works. I know growth and this makes sense because I can get my community involved in this and let's try it out. And I highly underestimated how long and how much work it would be to get audited financials. It took me a better part of a year to get it all done. And at that point, you have like five months left of runway. We had found some revenues there. So maybe I had extended it to like seven or something.

27:46Pulled back all UA. So to give you context, revenue went from$25 million,$22 million down to$8 million in 23. Painful, man. Yeah, it was painful. But we pulled back all UA, effectively, you know, we're spending, like, way from spending one, two million a month down to, like, 50K, right, at best. So we launched that crowdfund in 23, end of 23, and in three months, we raised$5 million. Right? Yeah, mostly through newsletter marketing and things like that, and I was surprised. I was like, wow, like, we crushed it. Like, very few companies go out and, like, launch and then raise that fast. They're also usually, like, 100K, 200K, like, these crowdfundings tend to be small.

28:24So$5 million, you know, in three months is, you know, top 1%. I mean, I don't know the numbers, but it's probably around there. Yeah. I mean, probably there are a few companies that have raised like 50 million plus in crowd funding. It's, it's rare. It's, it's very, um, yeah, it's like the 0.1%, 0.01 % probably, you know, it's usually like really big ideas that are, have a good marketer or a founder that's founder led marketing, or it's these little baby kind of startups that, uh, have raising a few hundred K type stuff. And the middle doesn't really exist that well. Right. So anyways, we did that, saw good product market fit, and enough that basically now I was like, okay, we should do the bigger version of this, which is called a reg A, right?

29:03Which that lets you raise$75 million in capital. More work, you got to get qualified by the SEC. I mean, it's a whole other undertaking. And we launched that a year later. And nine months after that, we had raised another$75 million or sold that out for$75 million in capital. And so, you know, there's a pattern there, right? And then I remember thinking to myself, even before, right? Even before, because in 24, we ended up doing$12 million in revenue. So we grew 50 % of it was good. And we cut our burn from like, I think the previous year was like$5 million or something down to like three. So we grew 50 % and cut burn.

29:37So getting more efficient, but still not quite where I wanted to be. and I remember thinking, okay, if we ever had the opportunity to raise this larger amount of capital, I am not going to fall in the same pattern and problem that I felt in the last time, which is extend, pay by period, everything at all costs. What we did was I basically thought about my business model and I was like, okay, unless we can get, like we should move into like licensing our technology, kind of like what Roku does. Like let's go to the big carriers. Let's go to the Samsungs of the world. Let's license them because we get their distribution and then we do a ref share.

30:07That's what Roku does. And they've been able to build tens of billions of dollars business off of that business model in the smart TV space. It's very similar. And so we basically were like, we're going to play really intelligent on user acquisition costs. And then if we get capital, we are going to take a play out of like, if you think about what we're doing, we're sending consumers into other services. And then an advertiser is paying us a certain amount because they have a bigger LTV on the other end. So I was like, can I just do that for myself? Like, can I go and acquire other apps and games and send my own consumers into those apps?

30:39But instead of just collecting the CPA fee or the CPM or whatever, I can actually capture the entire LTV on the backside. I'm going to ask you for a small favor, a tiny little favor. In fact, it's not even now that I think about it, it's not even really a favor for me. I'm actually trying to help you do a favor for you. Just hit the follow button. You won't miss out on the next episode. You'll see everything that we release. if you don't want to listen to an episode, you just skip it. But at least you don't miss out. Can we maybe pause here? Yeah, let's think about maybe like just to make this all concrete, right?

31:12Take a game. Like I have a mobile game, right? How do I earn money as somebody who makes a game? Like realistically, people paying in-app and doing these things and ads. I mean, those are probably my two ways that I make money. I need to get people to play my game to begin with. You know, let's just imagine ad revenue is the main thing. People are paying me to show their ads in my game. and I'm paying the App Store or Google or whatever to show my game to other people and I might pay you, you know what, why am I paying somebody to see something or paying somebody to click something to maybe then download and then have that funnel?

31:45I just pay you and you guarantee they play the game for X amount of time? Like, is that how to think about it? Yeah, so basically, say a big game, let's just use Candy Crush as an example. Candy Crush will say, hey, I'm willing to pay$10 for a user to come into my product and it has to back out for them. Like they have to see that their LTV is going to be higher than$10 or they're not going to pay that. And so what we'll do is we'll go to the consumer and it's like, hey, look, we'll pay you$5. We'll pay you per minute you play Candy Crush. So it's not like you're getting$5 on the download or else everyone's just going to download and stop right there.

32:15And then you can create a habit off of that. If you get to these different milestones deeper and deeper in the funnel, so get to certain levels or in-app purchases, you may earn well beyond$10, right? Because you're a certain type of user. You're kind of like, you become like a more valuable user to that ecosystem. If they notice that you're not buying anything, then they're going to start showing you more advertising, like most of these companies do. These users tend to be more ad tolerant, right? Because at the end of the day, they're getting some sort of reward for taking action. Those other advertisers could be other games, they could be CBG companies, whatever.

32:45I mean, at the end of the day, just because someone's budget conscious doesn't necessarily mean they don't have any money. It just means that they're more thoughtful about how they have to spend. So anyways, that was the thesis of the model is like we take a percentage of the revenue and then align incentives to a specific action that the user takes. So that was like how it all started, right? From an advertising standpoint. It's just a pretty crazy loop. Like when you think about somebody that's going to get paid, but with games, I can see it, right? Because you pay somebody to play for a certain amount of time in the thesis and you show them ads when they play, you make money off them there.

33:14But the thesis is they become just a player. Like at some point, some percentage of them actually love the game. Yeah, the games are good. they're not like you're not just showing like trash to them and that's why the model works right and that's why the whole thesis is like what are things that people are going to do anyways so that's my question games is obvious but what are some other things because you could imagine in some place where it's obviously going to break like go do this behavior but you know whatever people don't like it it's not habit for you just churn out and then nobody's you know just a clear loss like you might make money but sure sure so and yeah and that's the constant game that you kind of have to like tweak.

33:47I'm in this. So news is another one. Like people are going to read the news, right? And then there's advertising that can occur in that. It could be also the offers that we talk about. Like, you know, when you start a three month, you may not be interested to start another three month thing to stars. Like I'm going to say stars because it's one that a lot of people aren't necessarily subscribed to. But if you're like, hey, get 20 bucks to get a three month free trial to stars. You then test out stars and then you're like, oh, you know what? Actually, yeah, there's some good movies here. Maybe I'm going to stay subscribed.

34:14I mean, it happens in almost anything, right? It could be also like a bank, like think about like Chime. Hey, connect your account and set up ACH, get 200 bucks. And so a portion of your paycheck is that, you get a bonus. Are you going to delete that bank account? You know what I mean? So I think like, you know, we basically kind of think about all these various activities that those actions can take. But now what's happening, and this is kind of like the manifestation of the company and growing, is this idea of like data, right? And in the AI world, consented data is like, that is the new thing, right?

34:46It has to be consented because of all this regulatory framework that's happening. And so if you think about what's happening in the space, AI agents, right, are effectively going to be doing stuff for us, right? It's like, hey, go, I need to go buy this thing or I need to go take this action. These AI agents need to know how humans navigate through apps, for example, and games, right? Like a gaming agent that's like my little friend that plays for me while I'm sleeping needs to understand how these 3D worlds operate. And so what we're able to do is also now, and this is what we're starting to get on now, is basically reward consumers to basically show recordings of the content that they're engaging, whether that be on a TikTok or an Uber Eats or a game.

35:26And then we could essentially reward them for the time spent on things that they're doing. Meanwhile, take the recordings and then you basically provide that to the Frontier Labs. And the Frontier Labs could then essentially create the next generation of gaming agents. And that's a very specific example, but this is happening in wearables, right? The next, basically, frontier labs are trying to figure out when does someone go from being a healthy person to a person that's developing diabetes. And in order for them to do that, they need to get significant amounts of wearable data and general data from healthy humans, and then essentially extrapolate that data.

35:59And essentially, you can reward the consumer for doing that, right? And so I always go back to an example of like, I did my first marathon last year, right? And I started religiously using Strava. It took me nine months to pay the$70 that Strava charges for the Strava premium because I just didn't see the value in it. Eventually I caved, but I can definitely afford it. A large percentage of people would not pay for that subscription. However, if Strava came out and was like, hey, if you give me your Apple health data, I will give you Strava premium for free for six months. That Apple health data anonymized because it would be anonymized.

36:33it's probably worth about$20 or$30 on an annual basis. If you think about what Strava is actually earning in a six-month period minus app store fees, it's about$20 or$30. And so the thesis is, you know, a certain percentage of people are never going to share that info, but a larger percentage of people will. And that's the whole back, go back to the whole theme where it all started with Slyker, Bearn app, all that stuff. People are willing to take action if you align incentive with them and you get their consent. And that's our whole business model, right? And now we're just doing it across a bunch of different apps and services that have product market fit that we can create incentive systems that allow the free users to provide insight and get rewards.

37:10And that could be in the format of money. It could also be in the format of free product, like the Shrava example that I just gave. It's just that, yeah, I love that. It's just such a direct way of getting the outcome that you want. Like, I want your data. Give me your data. I'll give you this, period. Like, not this crazy roundabout way of everything else, which makes a lot of sense. Let's pause there. Let's do these two kind of tactical deep dives we're going to do. The first one, let's talk about, you know, you're a growth person, right? Let's talk about growth marketing. You were talking about this, let's say, emerging channel.

37:36I mean, there's always different things that are working better than others. And TikTok comes, it's TikTok. And then the next thing, in your case, Instagram is at the beginning, the app store, etc. Today, we're talking a lot about creator-led growth marketing. Tell me about what you're seeing in that channel, how a founder might be able to leverage that to grow their app, whether it's consumer, B2B, whatever. If I were starting in the space, right, again, and I didn't have a huge UA budget, and even if I did have a UA budget, I would do this and we are doing this. But we see a lot of apps, right?

38:04We're always in the business of looking for new products that have product market fit. And I'm meeting all these like 20-something-year-olds that were basically me 10 years ago, doing these like one-off apps. And the amount of times that I've seen, like how have you scaled this? It's not through paid user acquisition. It's not them going to Facebook and Google. Like sometimes they do that a little bit, but a lot of them don't even know how to do that. What they're doing is there's this idea of clipping, right? which you can essentially, that's how a lot of the big kit guys and YouTubers are growing their channels.

38:37And this is slightly different. It's like basically they get creators and creators is different than influencers. Creators are people that are good at making those little short form TikToks and reels, et cetera. And they basically pay them like 30 to$50 per video and give them basically, hey, look, I have this product. I need you to create captivating content for like a specific niche and then post it on TikTok or Instagram Reels or whatever. And basically it's like one video a day. But if you think about it, say every video is 30 bucks and it's 30 videos, it's about$1 ,000 a month. If you get 30 creators that are doing that, you're getting 30 times 30, you're posting 900 videos.

39:14Of 900 videos, if you mathematically think about how the algorithm generally operates, if 1 % goes viral, that's nine videos, right? Some of those videos will get hundreds of thousands, if not millions of views. Those people then see that video, it feels organic because these people are good creators. They're not, it doesn't feel like an ad. And the difference between them and influencers is just the number of followers. These guys will have no followers effectively. They most of the time have no followers. And in fact, they're actually, their entire job is to just make videos for you effectively.

39:44And that's like, and then you can give them like bonuses on that, but it has to be, it has to feel organic, right? That's what they're really good at. And look, if you want to look at who did this really well and actually got an exit out of it, relatively bootstrap team, the Cal AI guys, right? Like Cal AI sold to MyFitnessPal. I can't remember if it was like 50 or 75 or whatever. They had thousands of these guys, right? And essentially like, you know, that's working really well right now, right? So tactically, that's a great opportunity for you to, it's something that I see, it's like almost the language.

40:13Like, you know, I think like, you know, I'm middle-aged, and you only guess I'm 37, right? In my 20s, the big growth loops were the shares and the referrals. And you could do stuff with like texting, like mass texting. And then the generation before me, when I was in college, it was the email stuff, right? Like how LinkedIn grew and Dropbox and all that stuff. So if you think about it, it's like that was the referral system. The next referral system was, you know, kind of what we were doing in the apps and like, you know, but these things get shut down over time because people, you know, capture.

40:42The one I see now that's most common with these like 20 somethings and like the Gen Z is this content creator led marketing because the algorithm in TikTok and Instagram are incentivized to help accounts with zero followers grow or else it messes up their loop. Like how do people become creators? And so as long as you can post stuff that resonates with people, feels authentic, you're going to get views. And so it's a great addition to paid marketing. And paid marketing today is getting more and more competitive because in the world of AI, products are easy to build, eCPMs are going up and it's becoming harder and harder.

41:19And the payment periods go longer and longer and you're competing with like the TikToks of the world on budgets and it's very difficult. Do you think on the creator light, do you think it works for consumer and B2B or do you need to have like a mass market, you know, like Duolingo. I'm Duolingo, like no brainer to do this because everybody could use it, right? But does it matter? Or if you're B2B in a niche, you just got to find the right creators. I actually think that like the niche is actually the best. Like think about how TikTok actually works, right? Because it's like, if I'm a nurse and I only talk about nurse stuff, the algorithm's going to know, show this to nurses.

41:51It's the best time ever in history to start a niche business, I think. because with this strategy at least because the algorithm will find the people who care about whatever you're talking about. And so B2B is great too. Like B2B is even better if it's a niche B2B product. Like if I build tech software solutions for plumbers, I can create a lot of great content. Yeah, walk me through how to do that. I mean, I've got a company, for example, doing B2B SaaS, AI B2B SaaS for property managers, right? Like short term, like you sell things, you have an Airbnb or whatever, right? They sell software that helps you make, you do that better.

42:23And they're like, you know what? I'm spending on Google. I'm spending on Instagram. I'm doing all this stuff. It's okay. Nothing's flying. I want to do this creator-led strategy. What do I do? I think like, yeah, figure out what are the problems that property managers are going to focus on, right? It's like, everyone's worried about what AI is going to do for their properties or how they should be using AI. I'm focused on videos that tell them like, here's what the top property managers are doing. And it's like almost a list of all and the services they're using, right? And then embed your service in there like as one of the services.

42:50It needs to feel authentic and organic. And that's the same, whether we're talking about property managers or whatever, right? I think that there was a guy that was actually able to do this and you might have probably saw it on Twitter. He had created that company called Pulsia or something and it was just AI slop spelled backwards. And basically like he was AI slopping like any niche effectively, but he scaled like 10 million ARR in like a few weeks, right? And the content wasn't even good. Like I remember like looking at the videos, like I was signing up to all of them. I was like everyone because I like to look at the growth loops and I was just like, this is wild.

43:24like you know what I mean just out of interest it was interesting but you see that's just the power of like that highly niche effective marketing but you just to be clear you make that you make the video yourself or you just have an idea of what the video is and you let them know I think to do this well you need to have someone that like I it should probably should be the founder if you don't have the time or you're a larger company like you need to have someone that can really understand like the process of the script and the content creation what you want to get I think like there was a good Twitter post around like one of the Cali iFounders I think posted where it's like if you remove the app from this the video probably wouldn't make sense to some degree but it also has to like resonate where it can't be like a an actual ad or feel like an ad because that's also not going to work he had broken it down actually I thought in a really thoughtful way and I can't I can't remember the name of the article but I was just looking up like he was he had posted about it and it gave a really good insight but let's say so you have this idea like okay let's figure out how to use AI for your business and you figure it out and you you got the tools and like this is the general script.

44:23Where do you get these creators, especially creators like in your niche? How do you find them? There's, yeah, I mean, there's platforms out there. Like one of them that we use, not getting a referral fee or anything, SideShift is like a plot, one of the platforms that we use. There's a bunch, dude, out there. I mean, but if you look at the SideShift as an example and then just look up like Asplod or something, where are all the competitors of SideShift, UGC creator platform, and it'll give you like 10 of them. And then ultimately from there, like it just takes, it's kind of like the same. I mean, there used to be these influencer marketplaces, right?

44:52It's the exact same thing, but for people that don't necessarily have followers. So I assume the prices are just less. You just need more of them. They're just way less. And then you can see how they, like what campaigns they worked with past, who they've worked with, et cetera. Then you could, it's like literally, if you think about Fiverr, like Fiverr for UGC creators, the best way I think about it, right? Or Upwork for UGC creators, best way. And then like, there's like managers that you could hire to help you do this. Or even agencies, right? So you can start with an agency, kind of give you the guidelines.

45:19I think that eventually once you figure it out, you can bring it in-house and see if it works. And then just like that was going to be my final question, like what's the benchmark? Like just like any channel, sometimes it works, sometimes it doesn't work for you. What should you be looking for in terms of how much money should you put, how many videos until you can gauge whether this strategy is working for you or for whatever reason isn't? I think it really depends on your product. I mean, it's not easy. Look, I think like we probably spent about$30 ,000 on one of our apps. We got a ton of use, but we didn't have the script down.

45:48Like it wasn't driving installs. and so optimizing to the right metric is installs, and so this is some of the stuff that I'm telling you. It's like what I learned. It's like having a ton of views if the video is like a viral video that someone's going to click on anyways or watch anyways because it's the piece there, and then having just like a brand. Like, you know, Stake did this, right? That's I think the difference of clipping versus like this strategy because like Polymarket happens to do this probably one of the best. It's like, you know, the odds because the product is embedded into the underlying advert, right?

46:21But that's very unique to their business, right? Because they can stay on top of current events, which algorithms like. That's why clipping that I don't think works for every other business because just having a brand on there with like some viral video, for us at least it just didn't work. Unless maybe if you're spending significant sums of money and then having a broader retargeting play around it. But if you're starting out zero to one, you know, it really should be founder-led. And I think, yeah, you'll know, I think within like 20, 30 grand. By founder-led, you mean like Like the scripting of it in the first few videos, like you want the founder to be part of it?

46:51It's not, he needs to be a part of the video, but it's like, he needs to understand like what am I selling really? And then working with the creator and then yeah, you got to iterate and then eventually you'll find it. The second thing I want to spend some time on because you're, you know, you did this twice already, very successfully is crowdfunding. What did you learn about running a successful crowdfunding campaign? Like how did you do it? The main thing I learned about crowdfunding is like people think that you'll launch a crowdfund and people will just come. There are two types of companies that are successful at crowdfunding.

47:16Ironically, Revolut did a crowdfunding round. It was actually one of the best crowdfunding returns in history, right? A lot of people don't know that. Mercury Bank also did a crowdfunding round. And the reason I mentioned some of these is like, the people that use Mercury are well-to-do founders, right? Are well-to-do people, right? Same thing with Substack. They all did crowdfunding rounds and they were able to sell them out within a week because they could just send it to their like, very well-to-do base that loves their product and they invest it. If you are a company like that, you should definitely do a crowdfunding round because it's amazing to be able to get your ambassadors and users and turn them into investors.

47:52Most new companies do not have that, right? And in my case, I had a lot of users, but my users don't necessarily have a ton of money. You know what I mean? And so we allow them to earn their shares, which allowed me to actually remove some of the gross margin that I would have to put out, right? Going back to the underlying example. But knowing that if people aren't going to come that are part of your user base, then you need to think about this the same way that you would think about user acquisition. and so we think about it in a way of like where do investors go like where do they find out about stuff like what do they read and we found like newsletters as being one of the best channels for investors because people that read newsletters they like to read content like to read news you can actually talk to someone in a paragraph or two it feels like a way more native ad and so for us we really utilize channels like that and one of the unlocks that we also figured out and this is not purposeful it just ended up what's happening when we did the demographics of people that were investing in mode.

48:44And you think about in my business, there's a lot of aspects to it. The average investor, 80 % of them were over the age of 55 and not our target market at all. So understanding that just because you have a product that caters to a certain audience does not mean that the person investing in that product will be that. And so you need to talk to that retail investor in a way that's kind of like more simplified than what you would talk to a VC, but also understand that they may not be your consumer, but they need to understand the opportunity, the market opportunity that you're presenting. And once we figure that out, like, we just look at it in the same way we look at user acquisition, like the cost for me to acquire an investor is$1 ,000.

49:22The average investor invests by$1 ,000. That's a five to one return, a percentage of those investors reinvest. It works very similar to SaaS cohorts, where you then get a bigger LTV. And so I think that that was like the biggest unlock of just how we approached it is just the same way you would approach it as a consumer centric founder. Perfect. Well, Dan, let's stop it there. I'll ask the one last question we always end on. What would be like your top advice for an early stage founder? Top advice, if I was starting again 10 years ago, I think I would be focusing more on buying businesses versus starting them zero to one.

49:52I know this whole show is about product market fit, but product market fit is really hard. It's probably the hardest thing. And I think that there's a lot of great apps out there that basically people don't have optimized and they've just kind of like let die, but it already has a foundation. And if you have a great product mind, you can go to that product, amplify it, and grow it quite significantly. And the valuations are at the lowest they've been because everyone's scared of AI. And so it's a great time if you have an opportunity to, I think, stack these businesses, stack cash flow, and grow.

50:22Then that's kind of like where I would focus my... Perfect. Well, Dan, thanks so much for jumping on the show, man. It's been great. For sure, dude. Thank you for having me. So picture this. It's months from now, years from now. And one of your founder friends, a really close founder friends of yours, guess what? their startup went bankrupt. And it turns out if you had just shared the product market fit show with them, they would have learned everything they needed to, to find product market fit and to create a huge success. But instead their startup has completely failed. You have blood on your hands.

50:52Don't let that happen. You don't want to live like that. It is terrible. So do what you need to do. Tell them about the show, send it to them, put it on WhatsApp, put it on Slack, put it where you need to put it. Just make sure they know about it and they check it out.