Published on August 10th, 2022
Author Evan Armstrong
Category How To
Evan Armstrong is an investor, founder, and adviser. He's a lead writer at Every, where he writes the Napkin Math, a publication focused on business breakdowns, by the numbers. Find him on Twitter: @itsearmstrong.
TL;DR Because 99% of creator revenue accumulates at the top .01% of creators, creator economy startups have to find a way to justify taking a % of revenue. This is not an easy task and only a select few will succeed in the coming bear market.
From 2020-2022, it was relatively easy to raise a seed round for your startup. All you had to do was cryptically tweet out the password, “I’m building something new in the creator economy,” and $5M would magically appear in your bank account. Even the A round would generally be that easy with crossover funds vomiting capital everywhere.
That was then, this is now. Interest rates are up! Digital monkeys now only sell for 100K instead of the millions they are worth! Founders are looking at 20x revenue multiples and shaking, crying, throwing up. Venture capitalists are learning what the phrase “cash flow” means. It’s terrible out there! I’m being more than a smidge facetious, but in all seriousness: private market capital is going to be in short supply for sometime.
My friends, a creator economy winter is coming. The result will be a thinning of the creator economy herd. In the short run, many of the buzzier startups will fold. In the long-term, the gritty teams will pull through this period with superlative companies serving this emerging class of digital entrepreneurs. The difference between the two will come down to how well these startups are able to answer one question: what are you doing to earn revenue share?
In researching this piece, I’ve talked with dozens of management teams, over a hundred creators, and the most prominent investors in the creator space. Thanks to all those who were so generous with their time..
Now, to business: to understand why revenue share is so important, we must go in depth of what creators are like as customers.
The good news for the creator economy is that there is a strong positive tailwind. More and more individuals are pursuing a life of creativity online. A report from Linktree pegs the total number of creators at ~200M. Another report by Kajabi puts it at 50M+. (Much of the difference is determined by how you determine the split between social media user and “creator”). Regardless, this is a huge number! And on an emotional level, there is something deeply satisfying about helping individuals build their own businesses and pursue their passions.
But as the space has developed past the initial craze in 2020, the negative aspects of the market have become more clear. Startups serving creators face multiple challenges around customer concentration, the importance of demand aggregation, and the low earnings of the creator middle class.
99% of creators won’t generate meaningful revenue: In constructing a venture capital portfolio, even for the very best investors in the world, only 3ish of every 20 companies will have truly stellar outcomes. This is considered a highly risky asset class. In contrast, over 90% of the gains accumulate with the top .01% of creators. Put another way, trying to invest in an early-stage creator will have something like 10x the risk of a typical early-stage startup risk. Note: Yes, there is more nuance to funding creators, but you get the general idea. This sector is riskyyyyyy.
We can look to Twitch as an example of what this looks like in practice. In a hack in Oct 2021, Twitch’s creators' earnings were leaked onto the internet. The results were shocking: