This week, I analyze Inside.com, which I think presents a “very VC deal” opportunity that may not be palatable to all readers, but does present a unique investment opportunity worth consideration if you can view it with the correct lens.

In one sentence, Inside.com is developing a media company that produces highly curated daily newsletters for very specific verticals such as venture capital, Donald Trump, and everything in between. Essentially they are the anti-social media, non-algorithm based news source, that utilizes humans to build real, truthful, relevant daily newsletters.

Above I mentioned that this is a very VC deal. So, what do I mean by that? Well, VCs are notorious for pursuing deals that may not present attractive short term cash flow positive businesses, but rather present opportunities for acquiring massive user bases. Think about Facebook, Twitter and Snapchat.

Snapchat to this day is burning through billions of dollars as it races to acquire more eyeballs that it could potentially monetize more effectively one day. This exercise in land grabbing eyeballs can be incredibly expensive and take years to effectively complete, but it has also led to some of the largest market cap companies in the US right now including Facebook.

It is not a model that all investors are comfortable with and it comes with a meaningful downside. Take for example MySpace who didn’t win the eyeball game and thus had no business model to fall back on.

However, user bases that can be monetized are pure gold in Silicon Valley, and VCs are willing to pursue them with fervor if they show an effective capability of doing so. Inside.com, is an investment you make with a user growth lens, rather than a revenue or profitability lens, because investing in this company could mean partaking in extended periods of losses in pursuit of becoming a larger entity.

My investment thesis for Inside.com is that this is a company that has shown compelling evidence, which I will explain in more detail later, that indicate an ability to build an valuable user base in an underutilized medium. I see an opportunity to invest in a company that will have a significant exit to one of the major social networks or media entities looking to access its valuable user base.

There is an interesting trend developing in this age of social media that is worth noting. While most people would likely think email is a dying medium, it is actually experiencing a renaissance period built on the backs of information overload.

 A study in 2016 by Quartz found that 94% of business executives, one of the core users of Insider.com, receive their news on a daily basis from email newsletters, more than websites (89%) or news apps (74%). Reason being, people are looking for ways to cut through the massive amounts of noise, and “fake news” on social media platforms to get just the information they need.

 And email is appealing across demographics including 73% of millenials that indicated they prefer to receive communications from a business via email in a 2016 study conducted by Adestra, a marketing platform.

 It’s the reason that newsletters such as TheSkimm (4 million users), The Hustle and NextDraft have been able to build massive user bases and businesses out of these daily curated newsletters focused on certain topics, and interest.

 Inside.com is capitalizing on this trend by building an at scale version of these upstart newsletters like TheSkimm, by envisioning a platform that offers 250 unique, hand curated email newsletters built on one trusted brand.

 Without the limitation to one topic, they have the opportunity to capture users across interest, demographics, etc., and build a wide-appeal business that is in vogue and has the ability to capture a massive and valuable audience.

To date, Inside.com has done two things that many startups in the valley have done before. They have pivoted and burnt through significant capital (about $20M of investors capital), to date.

Interestingly enough, the company was started by well known Angel investor Jason Calacanis back in 2007 under a different name (called Mahalo) and grew into a top 100 site on the internet. However, a change in the Google algorithm search depleted the website of almost all of its viewers.

This experience helped Jason to study and explore other less platform dependent methods of distribution. Finally, he landed on the email newsletter that has caught traction with 390K unique subscribers with 50% quarterly growth in users over the past 2 years.

With a pivot and spent capital to find product-market fit, this is an intriguing point of entry for investors.

1. Product-market fit: As I mentioned above, email newsletters are a growing and trendy source for readers to acquire news on a daily basis despite the presence of so many social media sources. The team eventually plans to launch 250 unique daily newsletters but has started out with 30, and has acquired almost 400K subscribers that account for almost 700K subscriptions.
2. This means that most people are not only subscribing to their newsletter, but they are subscribing to more than one, which is the kind of stickiness you want to see from your user base. The 30%+ open rate also indicates they are building a relevant newsletter following, as this is slightly above industry average.
3. Efficient customer acquisition: To date, Inside.com has acquired almost 400K readers through word of mouth, which is astounding. Though more capital from this raise will go into paid acquisition, and continue to ramp, it does show that they have methods for being more sustainably minded in terms of growth if needed. The customers they are acquiring are also highly valuable with 51% of them being identified by a third-party as executive-level individuals.
4. Monetization model: The team is building in an advertising model and a premium paid subscription model to the business. Last year, the team booked $465K in revenue according to their income statement with the vast majority coming from advertising, which accounted for $307K.
5. Since 2017, they have started pushing the paid subscription model and have seen 20%+ month-over-month growth in revenue during 2018. At $100K in revenue in May, the team is now at a $1M annual run rate in revenue. By year end the team expects to drive an estimated $2.8M in sales with paid subscriptions accounting for about 10% of that, and the rest coming from advertising.
6. Though the financials aren’t great, if you look at estimates for the year, you can see the team is planning to spend heavily on sales and marketing, which is to be expected of a company looking to build a massive user base.
7. Battle tested founder: Jason Calacanis is well esteemed in the entrepreneur community, and for good reason. Over the past 20 years he has been an early investor in startups like Uber, hosted podcast covering the startup market, worked as a scout for Sequoia Capital, and had his company Weblogs, Inc. acquired by AOL in 2005.
8. He has shown an ability to build and adapt products in the startup community before, and Weblogs was actually a publishing company with famous brands such as endgadget to its credit. Put simply, he knows how to build media companies. He has also been running Inside.com since 2007 and has kept it going despite all the challenges I mentioned earlier, which involved pivots and raising more VC dollars to keep the business in existence.
9. Acquisition within reach: If you remember, Facebook acquired Instagram for $1B, Yahoo acquired Tumblr for $1.1B, and Twitter acquired Vine for $30M. The reality is, being able to find captured, high value demographics with product features people want is something the social media companies will continue to chase, even without a revenue model in place. If Jason can execute I can absolutely see a company acquiring Inside.com.
10. And if it is not one of the really big names, I can see large content producers like Medium or even Reddit finding value in an organization like this. Many opportunities are going to exist in the acquisition market for Jason and the team, whether or not they can find a way to make this a profitable business.

The team is currently raising $3M at a $15M valuation cap, effectively saying if the deal converts, Inside.com will be providing a 20% stake in the company during this round of financing.Though the team only cleared a little over $400K in revenue last year, the team has shown an ability to grow revenues this year, and are still on pace to hit between $2 and $3M in revenue.

At that rate, the team is providing a valuation at 5-8 times revenue with a torrid pace of user growth and signs that they can monetize those users too. With the valuations you have seen for other companies in the content / user space, the valuation seems reasonable enough to provide investor upside moving forward.

Inside.com is a Deal To Watch, which we reserve for the top 10-20% of all deals. It is not a Top Deal for the concern around continued capital burning and a potential of not being able to keep customer acquisition cost all that low moving forward in order to accelerate user growth.

Nonetheless, I think this is a wise investment for the right investor who understands the value of user networks, and investing in an experienced team that is showing the capability of building a product that has significant demand as well as a monetization model that can become really interesting with a multi-million person user base.

If we see an acquisition of $250 to $500M for this business to one of the social media giants, I think that would be a terrific win for investors.