Why investors don’t fund dating

I’ve been listening to the excellent Season 2 of the podcast Startup, which gives an inside look at YCombinator startup The Dating Ring (NYT coverage here). The episodes are all great. They talk about many important topics, but I had some specific comments on fundraising for dating products.

Here’s a simple fact: It’s super hard to get a dating product funded by mainstream Silicon Valley investors, even though it’s a favorite startup category from 20-something entrepreneurs. There’s a large swath of angels/funds who categorically refuse to invest in the dating category in the same way that many refuse to invest in games, hardware, gambling, etc. Perhaps they’d make an exception for a breakout like CoffeeMeetsBagel (I’m an advisor) or Tinder, but in the main, it’s an uphill battle for dating apps to attract interest. Here’s some data on the few dating cos that have raised.

Obviously, anyone starting a new company in dating should try to understand investor biases in this sector. This essay also compliments a previous one on operating, from HowAboutWe co-founder Aaron Schildkrout, now at Uber, who also wrote about his experiences.

Here are the reasons usually given for why investors don’t do dating:

• Built-in churn
• Dating has a shelf-life
• Paid acquisition channels are expensive
• City-by-city expansion sucks
• Hard to exit
• Demographic mismatch with investors

Let’s break it down.

Built-in churn

Churn sucks, and the better your dating product works, the more your customers will churn*. Every churned customer is a new customer you’ll have to acquire just to get back to even. When you look at a successful subscription service like Netflix or Hulu, you might find a churn rate of 2-5% per month, and you can calculate the annual churn through the following:

Annual Churn = 1-(1-churn_rate)^12
2% monthly churn = 1-(1-0.02)^12 = 21% annual churn
10% monthly churn = 1-(1-0.1)^12 = 70% annual churn

If you have an 70% annual churn rate, you have to have a strategy to replace almost your entire customer base each year, plus a bunch of percentage points to drive topline growth. You can imagine why successful public SaaS companies try to keep their monthly churn under 2%.

So what do the churn rates look like for a dating product? I’ve heard numbers as high as 20-30% monthly. Let’s calculate that:

20% monthly churn = 1-(1-0.2)^12 = 93% annual churn