Smiga: This is Brian Smiga with the Alpha Venture Podcast. I’m here today with Josh Siegel of Rubicon Ventures. Welcome, Josh.
Josh: Thank you Brian. Happy to be here.
Smiga: Alpha Ventures is a growth stage venture fund that works with funds like Rubicon to assist in fully monetizing their pro rata in later stage rounds, and as a result, we’re tracking category leaders that our vc partners have invested. Josh is here today to talk about Rubicon, and also about a category leading company he’s invested in, which is doing phenomenally well. So Josh, welcome to the show, and please tell us about Rubicon.
Josh: Rubicon Venture Capital is a bi-coastal firm. We have offices in San Francisco and New York City. We’re generalists. We invest typically in late seed, series A, and series B rounds of software internet tech companies. So that can be Fin Tech, Enterprise SAS, B2B, B2C, insurance tech, hospitality tech, mobile big data, artificial intelligence, machine learning, and things like that. We stay away from healthcare, ED tech, energy companies, oil and gas, and anything that’s highly-regulated, like smart city stuff, and things of that nature. Geographically, we can invest anywhere, be it within the United States, or externally. We have done several international investments.
Smiga: Great. So you’ve got a great group of companies in your portfolio, and performance today, it’s been great, because we’ve been following Rubicon for four years. But one standout winner is TodayTix. Maybe we could start with the origin story: why did the founders create TodayTix? And when did you first meet them and what prompted your decision to invest?
Josh: The Rubicon office in New York City is in the Meat Packing district in the WeWork Building, principally because I live a few blocks away. So it’s ultra convenient, but also because there’s lots of companies coming through the building, on a monthly basis. So there’s about a 150 companies that cycle through here every month, and it just so happens that the original two founders of TodayTix had the office next door to mine.
So, I met them fairly early, before they had taken any seed capital, because it was just two guys that had an idea, that wanted to create something to up end the Broadway ticketing market, originally in New York City. I met them in October of 2011. We did not invest until April of 2014. So I’d known them for a good two years plus, before we made our initial investment, and over time, I got to know them as individuals. I got to know them as entrepreneurial partners. I advised them on how to do their early seed round. I was able to introduce them to their legal counsel, who helped them found the company, and structure the deals, and I provided mentorship and support for quite a bit of time, before making an investment, and it was a great way to get to know them.
One thing that’s important to understand about Rubicon is that we are not really a seed stage investment venture capital firm. So we like to see some traction before we’re writing that check, and sometimes, startups can take a long time before they’re generating that initial million dollars in ARR, which is what we like to see.
Smiga: That’s great. So there was a long “two and a half years get to know each other” period, and I guess one take away here is that venture firms, like yours, when they have a good hangout, and see lots of companies, can pick the top one or two percent of those companies that make an impression on you, provide some add-on value, and then eventually, you came together. So what catalyzed the decision in April of 14 to invest?
Josh: In 2013 we were watching how the launch was going, and how things were happening. As a native New Yorker, I understood the dynamics of the market, and what they were trying to solve, because as most New Yorkers, and even a lot of tourists know, there’s what’s known as a TKTS booth in the middle of Time Square, which is a last minute ticketing booth for off-Broadway, and Broadway theater tickets, and basically, you have to wait in line, for three or more hours, in order to buy same day discounted tickets.
Brian Fenty and Merritt Baer were mobilizing that entire process, which to me, made perfect sense. You know, why stand in line when you can just do it on your phone? So it was a no-brainer. The key is how do you get people to change behavior. How do you get the word out, how do you get people to know what’s going on. The other issue is availability of inventory. Theater is still very much a handshake business. It’s not run by big corporations. Although #Disney does have a foot in the door, but it’s still a family-operated business, at least in New York, and most of the big theater cities.
So you have to get inventory directly from the theaters, which means directly from the people that own them, or own the shows. You can’t just go online and be like, “Hey, I want a $100,000 worth of tickets for Show xyz.” It doesn’t work that way. But both Brian Fenty and Merritt had a lot of relationships, and they were able to get the inventory, and then, they were able to sell it, along with a certain amount of fees and commissions, in order to start the business.
And so, we were watching carefully. So following the launch, they realized, “Hey, we need to raise additional capital to fuel marketing growth, because now that this thing works, we’ve done the test, we actually need to construct a full round of capital to get us to the next milestones.” And that’s when we came in as a fund.
Smiga: Yeah. I would expect that with the TKTS booth on your mobile, all of a sudden, you had younger, perhaps more loyal, more interesting patrons, buying tickets, and that must’ve been an important signal to the producers, and the providers of inventory. Is that the case today? Does TodayTix bring a younger, more avid audience to the theater?
Josh: Yes. That is the situation today. At first we weren’t sure, but today, a majority of the tickets are purchased by the under 35 set, and ticket pricing in the theater business is quite high, over a $100 a ticket, typically, and so, they’re spending more money on a per transaction basis, and it’s a younger demographic. So they’re bringing more people, but more important, they know exactly who the people are that are buying the tickets, because it’s on your mobile device, it’s not from a third party, it’s not just random, right? And you have to have the device with you, in order to pick up the tickets from the TodayTix personnel, that stand outside the theater. There’s ways to do gift tix, but 90 plus percent of the people are using the tickets themselves. So the theaters actually do get to know who’s actually in their seats.
Smiga: Yeah. So lots of advantages for both sides over doing the TKTS booth, and then the ultimate sales, and customer loyalty programs are on the mobile phone. Along the way, there had to be interesting pivots, and or reaches that the founders needed to make, whether it was moving to London, or other. Can you describe one of these heroic changes, or leaps that the founders made?
Josh: Yeah. The biggest change was the business model. Originally, they were taking a commission on the fee structure of each ticket. So if you sold the ticket for a $100, they were taking anywhere between 5 and 10%.
Smiga: Right.
Josh: What has happened in the last year or so, is they realized that consumers are open to paying for convenience fees of getting the tickets delivered, and buying them on their mobile device, and that has been a real game changer in the revenue model for the company. So TodayTix instituted convenience fees, they instituted the delivery fee, and the fall off was negligible. People were not resistant to paying those fees for saving time and getting a better experience. So that is made it so that the company is no longer venture-subsidized, which happens with a lot of companies.
The other leap is expanding to other geographies. So right now, TodayTix is in New York, Connecticut, Washington DC, Chicago, San Francisco, LA, London, Toronto, and a number of other secondary cities. They’re going to be launching more cities in Europe later this year. What you have to understand is that live theater is a 50 billion dollar a year market. That’s huge. Most people don’t understand theater.
So a lot of VCs just never understood the size of the market. They did not understand 8 shows a week, the limited quantity, and the scarcity making the best tickets, you know, $100 plus, versus a movie ticket, at $7-12.
Smiga: I’d like to unpack that 50 billion number a little bit, if you’re prepared to do so. So I’m presuming we’re talking about all live performances, which would include comedy, as well as live theater. Does that number also include live musical performances?
Josh: No, it does not include concerts, and things of that nature. That’s a whole different category. These are more theatrical type performances, so your Broadway, off-Broadway theater, Opera, concerts, Lincoln Center. Comedy, Dance, things like that. But not your #TicketMaster or #Bruce Springsteen concerts.
Smiga: When I log in to TodayTix, the ability to navigate and find an event that suits me, and my time frame, and my budget, is quite amazing. You know, I used to do this through the New York Times, and then go to the TKTS booth. So in New York, there’s a very big theater market, and it’s a very big paradigm shift away from that booth, on Time Square. There used to be one in the World Trade Center, remember that?
Josh: Yeah.
Smiga: But in other cities, like London and elsewhere, are they similarly displacing, or at least providing an alternative to a same day ticket buying platform?
Josh: Yes, they are. So in London especially, there are a number of outlets you can go to for same day tickets, and the West End, which is the Broadway of London, and they have a number of cheap tickets, you know, day of, but there’s no easy way to get them on mobile, except via TodayTix. I mean, it is the de facto tech category leader. The challenge with a lot of these cities is it’s still all about customer acquisition costs. You know, you still have to get people to know about the app, and download it, in order to use it, and those people that use it, do typically use it again and again.
So the challenge when entering a new market is, yes, you’re displacing an incumbent, which is fine, you have superior technology, you have the inventory, which is really important, and now, you have to get the customers.
Smiga: Right. So this formula, which we call customer unit economics, around the cost to get a customer, and their ultimate lifetime value, it’s got to vary in Berlin, versus London, versus New York, or does it hold steady, or how quickly can TodayTix enter a city, and establish what numbers are going to hold, in terms of customer acquisition costs, versus lifetime value?
Josh: Right. So in a lot of the newer cities, it’s still a little bit of an unknown. They know what the personnel cost will be, in terms of how many people they need to service the city from customer standpoint, how many people they need to establish relationships with the theaters and get tickets. So from the staffing perspective, they have that pretty much nailed down. The challenge is on the marketing cost. You know, where do you market, traditional marketing in, like, subways or taxi cabs, versus digital marketing, versus couponing, or sending emails through the system from friends who already downloaded the app.
So there’s still a lot of learnings that happen there, but in the bigger cities, they’ve lowered the cost of customer acquisition. I can’t divulge details, but typically, it’s greater than a three to one ratio of lifetime value to customer acquisition cost. We expect that ratio to increase to over five to one, over time.
You know, this is the challenge with startups, in that they don’t always know what works at first, which is why they need venture capital financing in order to get that money, to try things out and to experiment. The challenge revolves around how big the theater market is in a particular city, and extrapolating. So if you know that the market in Berlin is over a 100 million dollars a year, then you know, it’s worth it to go in. By comparison, New York, which is one of the largest theater markets, is a 1.2 billion market on an annual basis. TKTS does about a 140 million, annually, of that billion two. So they have, you know, 10- 12% market share, and that’s been steady for decades. TodayTix will probably do over 65 million in New York alone, in 2017. After only a couple years.
Smiga: Wow, and that’s just in three years.
Josh: Yeah.
Smiga: Excellent. I want to wrap up with a couple of the pieces of advice you’ve offered, that are valuable, and maybe you have another one to add. Firstly, it’s clear that VCs that hang out where there are many startups can pick the top 1 or 2%, after spending a significant time with the founders, and it sounds like you did several years of assistance, pro-bono to TodayTix, before deciding to invest.
Josh: Well, we do everything pro-bono.
Smiga: Yeah.
Josh: Everything we venture investors do is essentially pro-bono, because we’re writing the check. We don’t charge as advisors, or mentors, or consultants, that’s not our job.
Smiga: Right.
Josh: Our job is to write a check, and then help.
Smiga: Agreed. Secondly it sounds like TodayTix figured out that the convenience of not having to wait two hours in the TKTS line, is something people were ready to pay for, above of the ticket price, and that that’s where they could improve gross margin per sale.
Josh: Correct.
Smiga: That’s exciting, and finally, that live theater is a much bigger market than all of us, than conventional wisdom foresaw. So that’s great. In closing, is there any other single piece of advice you’d offer to VCs in the audience, that are seeking a company like this? What learning did you get from TodayTix, that you’re now taking with you forward?
Josh: I think a lot of us do watch companies for quite a bit of time before we’re making an investment. You know, TodayTix was one of those that happened at the right place, at the right time, and I had the inside track to understand the business model. We’re generalists, as venture capital firms, so we need to understand many different kinds of businesses. I think that’s one of our advantages, at Rubicon. There are a lot of venture capital firms that are narrow-focused, that only focus on Fin Tech, or on enterprise, or frontier tech, and I think they might miss an opportunity that they otherwise wouldn’t understand, right? Which is unfortunate, because at the end of the day, we have to put capital to work.
So, at least for the younger VCs out there, I think, do not typecast yourself into one specific vertical or thesis, because that vertical may blow up at some point, or just may not have a need for you, or it could be all different kinds of things. So give yourself room to maneuver. In terms of TodayTix, from the founders side, they had a really deep bench of excellent angel investors, and then, us as the first venture capital investors, and then, we brought in other smart VCs along with us.
The challenge, however, was that they really didn’t have a deep pipeline of VCs to go to, because VCs didn’t understand their business. I think that founders out there really need to know their audience. So if you’re talking to different kinds of VCs, before you get to them, learn who they are, learn what pain points they want to see solved, learn how they think, and approach them from an investment need, from that standpoint. Don’t just be like, “Hey, this is an awesome business, you don’t understand it, so you know, we’re not going to waste our time.” It’s not their job. Their job is to evaluate the business based on what they understand from you, the founder, right? So that’s critical.
The other thing, on the founder side, is that you need to know what you’re good at, and what you’re not good at, and be able to divide up, and delegate. You can’t do everything as a founder, and sooner or later, you’ll have to delegate stuff that you otherwise were doing every day, and understand that, as you grow your business, other people can make decisions without your input, and that’s what happens when a company grows.
Smiga: That’s great. So let’s leave it there, and I think one of the great things about TodayTix, for our audience, is they can go out, and get the app, and buy theater tickets for friends and family, today. As a customer, Alpha and I have been following Brian Fenty, and Josh Siegel in their journey. I can tell you it’s a really phenomenal app. It’s the only way to get tickets in New York and London, and I’ve used it in both cities, and I really want to see this company go all the way to a public offering. In any case, thank you Josh for your time, today.