China’s startup ecosystem is hitting back at demanding working hours

In China, the laws limit work to 44 hours a week and require overtime pay for anything above that. But many aren’t following the rules, and a rare online movement puts a spotlight on extended work hours in China’s booming tech sector. People from all corners of society have rallied in support for improvements to startup working conditions, while some warn of hurdles in a culture ingrained in the belief that more work leads to greater success.

In late March, anonymous activists introduced 996.ICU, a domain name that represents the grueling life of Chinese programmers: who work from 9 am to 9 pm, 6 days a week with the threat of ending up at ICU, a hospital’s intensive care unit. The site details local labor laws that explicitly prohibit overtime work without pay. The slogan “Developers’ lives matter” appears at the bottom in solemn silence.

A project called 996.ICU soon followed on GitHub, the Microsoft-owned code and tool sharing site. Programmers flocked to air their grievances, compiling a list of Chinese companies that reportedly practice 996 working. Among them were major names like e-commerce leaders Alibaba, JD.com and Pinduoduo, as well as telecoms equipment maker Huawei and Bytedance, the parent company of the red-hot short video app TikTok.

In an email response to TechCrunch, JD claimed it doesn’t force employees to work overtime.

“JD.com is a competitive workplace that rewards initiative and hard work, which is consistent with our entrepreneurial roots. We’re getting back to those roots as we seek, develop and reward staff who share the same hunger and values,” the spokesperson said.

Alibaba declined to comment on the GitHub movement, although founder Jack Ma shared on Weibo Friday his view on the 996 regime.

“No companies should or can force employees into working 996,” wrote Ma. “But young people need to understand that happiness comes from hard work. I don’t defend 996, but I pay my respect to hard workers!”

Bytedance declined to comment on whether its employees work 996. We contacted Huawei but had not heard back from the company at the time of writing.

996.ICU rapidly rocketed to be the most-starred project on GitHub, which claims to be the world’s largest host of source codes. The protest certainly turned heads among tech bosses as China-based users soon noticed a number of browsers owned by companies practicing 996 had restricted access to the webpage.

The 996 dilemma

The 996 list is far from exhaustive as it comprises of voluntary entries from GitHub users. It’s also hard to nail down the average work hours at a firm, especially a behemoth with tens of thousands of employees where policies can differ across departments. For instance, it’s widely acknowledged that developers work longer than their peers in other units. Anecdotally, TechCrunch has heard that bosses in some organizations often find ways to exploit loopholes, such as setting unrealistic KPIs without explicitly writing 996 into employee contracts.

“While our company doesn’t force us into 996, sometimes, poor planning from upper management forces us to work long hours to meet arbitrary management deadlines,” a Beijing-based engineer at a professional networking site told TechCrunch. This person is one of many sources who spoke anonymously because they are not authorized to speak to media.

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BEIJING, CHINA APRIL 25, 2018: Passenger on a train in the Beijing Subway. Donat Sorokin/TASS (Photo by Donat SorokinTASS via Getty Images)

Other companies are more vocal about 996, taking pride in their excessively diligent culture. Youzan, the Tencent-backed, Shopify -like e-commerce solution provider, explicitly demanded staff to live out 996 work styles. Employees subsequently filed complaints in January to local labor authorities, which were said to have launched an investigation into Youzan.

A lot of companies are like Youzan, which equates long hours of work with success. That mindset can easily lure programmers or other staff into accepting extra work time. But employees are hardly the only ones burning out as entrepreneurs are under even greater pressure to grow the business they build from scratch.

“The recent debate over 996 brings to light the intense competition in China’s tech industry. To survive, startups and large companies have no choice but to work extremely hard. Some renown entrepreneurs even work over 100 hours a week,” Jake Xie, vice president of investment at China Growth Capital, an early-stage venture fund, told TechCrunch.

“Overtime is a norm at many internet companies. If we don’t work more, we fall behind,” said a founder of a Shenzhen-based mobile game developing startup. Competition is particularly cut-throat in China’s mobile gaming sector, where creativity is in short supply and a popular shortcut to success is knocking off an already viral title. Speed, therefore, is all it matters.

Meanwhile, a high-performing culture brewing in China may neutralize society’s resistance to 996. Driven individuals band together at gyms and yoga studios to sweat off stress. Getting group dinners before returning to work every night becomes essential to one’s social life, especially for those that don’t yet have children.

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Photo source: Jack Ma via Weibo

“There is a belief that more hours equals more learning. I think some percentage of people want to put in more hours, and that percentage is highest for 22 to 30 years old,” a Shanghai-based executive at a tech company told TechCrunch. “A few people in my team have expressed to us that they feel they cannot grow as fast as their friends who are working at companies that practice 996.”

“If you don’t work 996 when you’re young, when will you?” Wrote 54-year-old Jack Ma in his Weibo post. “To this day, I’m definitely working 12 to 12, let alone 996… Not everyone practicing 996 has the chance to do things that are valuable and meaningful with a sense of achievement. So I think it’s a blessing for the BATs of China to be able to work 996.”

(BAT is short for Baidu, Alibaba and Tencent for their digital dominance in China, akin to FANNG in the west.)

Demanding hours are certainly not unique to the tech industry. Media and literature have long documented the strenuous work conditions in China’s manufacturing sector. Neighboring Japan is plagued by karoshi or “death from overwork” among its salarymen and Korean companies are also known for imposing back-breaking hours on workers, compelling the government to step in.

Attempts to change

Despite those apparent blocks, the anti-996 movement has garnered domestic attention. The trending topic “996ICU gets blocked by large companies” has generated nearly 2,000 posts and 6.3 million views on Weibo. China’s state-run broadcaster CCTV chronicled the incident and accused overtime work of causing “substantial physical and psychological consequences” in employees. Outside China, Python creator Guido van Rossum raised awareness about China’s 996 work routine in a tweet and on a forum.

“Can we do something for 996 programmers in China?” He wrote in a thread viewed 16,700 times.

The 996 campaign that began as a verbal outcry soon led to material acts. Shanghai-based lawyer Katt Gu and startup founder Suji Yan, who say they aren’t involved in the 996.ICU project, put forward an Anti-996 License that would keep companies in violation of domestic or global labor laws from using its open source software.

But some cautioned the restriction may undermine the spirit of open source, which denotes that a piece of software is distributed free and the source code undergirding it is accessible to others so they can study, share and modify the creator’s work.

“I strongly oppose and condemn 996, but at the same time I disagree with adding discretionary clauses to an open source project or using an open source project for the political game,” You Yuxi, creator of open-source project Vue, which was released under the MIT license, said on the Chinese equivalent to Twitter, Weibo. (Gu denies her project has any “political factors.”)

Others take a less aggressive approach, applauding companies that embrace the more humane schedule of “9 am to 5 pm for 5 days a week” via the “995.WLB” GitHub project. (WLB is short for “work-life balance.”) On this list are companies like Douban, the book and film review site famous for its “slow” growth but enduring popularity with China’s self-proclaimed hippies. WeWork, the workplace service provider that bills itself as showing respect for employees’ lives outside work, was also nominated.

While many nominees on the 996 list appear to be commercially successful, others point to a selection bias in the notion that more work bears greater fruit.

“If a company is large enough and are revealed to be practicing 996, the issue gets more attention. Take Youzan and JD for example,” a Shanghai-based developer at an enterprise software startup told TechCrunch.

“Conversely, a lot of companies that do practice 996 but have not been commercially successful are overlooked. There is no sufficient evidence that shows a company’s growth is linked to 996… What bosses should evaluate is productivity, not hours.”

Or, as some may suggest, managers should get better at incentivizing employees rather than blindingly asking for more hours.

“As long as [China’s] economy doesn’t stall, it may be hard to stop 996 from happening. This is not a problem of the individual. It’s an economic problem. What we can do is offering more humane care and inspiring workers to reflect, ‘Am I working at free will and with passion?’ instead of looking at their work hours,” suggested Xie of China Growth Capital.

While a push towards more disciplined work hours may be slow to come, experts have suggested another area where workers can strive for better treatment.

“It seems almost all startups in China underfund the social security or housing fund especially when they are young, that is, before series A or even series B financing,” Benjamin Qiu, partner at law firm Loeb & Loeb LLP, explained to TechCrunch.

“Compared to 996, the employees have an even stronger legal claim on the above since it violates regulations and financially hurts the employee. That said, the official social credit and housing fund requirement in China appears to be an undue burden on the employer compared to the Silicon Valley, but if complied with, it could be understood as an offset of the 996 culture.”

A number of my interviewees spoke on conditions of anonymity, not because their companies promote 996 but, curiously, because their employers don’t want to become ensnarled in the 996 discussions. “We don’t need to tell people we support work-life balance. We show it with action,” said a spokesperson for one company.

Before breaking up with Shopify, Mailchimp quietly acqui-hired LemonStand, a Shopify competitor

Here’s an interesting twist on the story from last week about the break-up between Shopify and Mailchimp, after the two said they were at odds over how customer data was shared between the two companies. It turns out that before it parted ways with Shopify, Mailchimp had quietly made an acquisition of LemonStand, one of the e-commerce platform’s smaller competitors, to bring more integrated e-commerce features into its platform.

After news broke of the rift between Mailchimp and Shopify, rumors started to circulate among people in the world of e-commerce about Mailchimp buying Vancouver-based LemonStand, which had announced on March 5 that it was shutting down its service in 90 days, on June 5, without much of an explanation why.

We were tipped off on those rumors, so we contacted Ross Paul, LemonStand’s VP of growth and an investor in the startup, who suggested we contact Mailchimp. (Paul now lists Mailchimp as his employer on his LinkedIn profile.) Mailchimp confirmed the deal, describing it as an acqui-hire, with the team now woking on light e-commerce functionality.

“Mailchimp acqui-hired the team behind LemonStand at the end of February,” Mailchimp said in a statement provided to TechCrunch. It did not provide any financial terms for the deal.

Mailchimp — which is privately held and based in Atlanta — said it made the acquisition to provide more features to its customers, specifically those in e-commerce.

“Mailchimp helps small businesses grow, and our e-commerce customers have been asking us to add more functionality to our platform to help them market more effectively,” the company said in a statement. “The LemonStand team is helping us build out our e-commerce light functionality.”

But Mailchimp is clear to say that its acqui-hire was not related to ending its relationship with Shopify.

“Our decision to discontinue our partnership with Shopify last week is unrelated to LemonStand,” Mailchimp said. “Shopify knew we were working on e-commerce features long before we hired the LemonStand team. In fact, we launched Shoppable Landing Pages last fall in partnership with Square, and Shopify chose not to partner with us on the launch.”

But even if the LemonStand deal is not related to its rift with Shopify, the acquisition of one and the breakup with the other both point to the same thing: the growing role of Mailchimp’s e-commerce business.

The company — which provides email marketing and other marketing services to business — has been slowly building a revenue stream in e-commerce by integrating a number of features into its platform to let its customers, for example, sell items as part of the marketing process. These are less about building full check-out experiences or commerce backends, but for offering, say, one-off sale items as part of a particular promotion or campaign.

Last year, when Mailchimp launched those new shoppable landing pages with Square, it said that 50 percent of its revenues were now coming from e-commerce, with its customers selling more than $22 billion worth of products in the first half of 2018. Mailchimp made some $600 million in revenue in 2018, which — if its 50 percent e-commerce figure remained consistent — meant that it made $300 million last year just from e-commerce-related services.

The Square partnership is instructive in light of this acquisition. While Mailchimp is indeed building some native e-commerce features for its platform, it will continue to work with third parties (if not Shopify, the biggest of them all) to provide other functionality.

“We believe small businesses are best served when they can choose which technology they use to run their businesses, which is why we integrate with more than 150 different apps and platforms including e-commerce platforms,” Mailchimp said in its statement to TechCrunch.

“We’re not trying to become an e-commerce platform or compete directly with companies like Shopify,” it added, “and we think that adding e-commerce features in Mailchimp will help our e-commerce partners. Companies will be able to start their businesses with Mailchimp and have a seamless experience, and eventually use Mailchimp along with one of our e-commerce partners.”

Mailchimp and Shopify break up

Shopify today announced that the Mailchimp app, which let its users use their Shopify data to create targeted email campaigns, for example, is no longer available in its marketplace. The reason for this, Shopify says, is that it “had growing concerns about Mailchimp’s app because of the poor merchant experience and their refusal to respect our Partner Program Agreement.”

Clearly, this isn’t the most amicable divorce.

“It’s critical for our merchants to have accurate, complete insight into their businesses and customers, and this isn’t possible when Mailchimp locks in their data,” Shopify explains. “Specifically, Mailchimp refuses to synchronize customer information captured on merchants’ online stores and email opt-out preferences. As a result, our merchants, other apps, and partner ecosystem can’t reliably serve their customers or comply with privacy legislation.”

Unsurprisingly, Mailchimp’s side of the story is a bit different. “Yesterday, we asked Shopify to remove the Mailchimp for Shopify integration from their marketplace,” the company wrote. “We made this decision because Shopify released updated terms that would negatively impact our business and put our users at risk.”

Mailchimp says it refused to provide Shopify with all the customer data it asked for because Shopify’s terms simply weren’t fair or practical. “We have been negotiating for months with Shopify on trying to get terms that were very fair and equitable to both of our businesses — and there were several points that we just weren’t willing to compromise on,” Christina Scavone, director of corporate communications told me. “Anything that hurts our customers’ privacy was a non-starter for us.” She also told me that Shopify specifically asked for pretty much any data Mailchimp collects about its users, including data it collected in the past since the app was installed. “We had no data of getting that consent from our users retroactively,” Scavone noted.

There may be another wrinkle to this story, too. In recent months, Mailchimp partnered with Square to launch its shoppable landing pages. That puts Mailchimp deeper into the e-commerce business and into competition with Shopify.

In its statement, Mailchimp argues that it integrates with more than 150 different apps and platforms. “We won’t compromise on that just because Shopify sees it as a competitive threat,” the company wrote. “We want people to have choices,” Scavone added. “The marketplace is starting to collide and people are starting to compete with each other and many of our other partners are also in our space and we would never limit a competitor from what they were willing to do for their business.”

In the end, we’ve got two companies that both argue they are putting their customers’ privacy first. This doesn’t strike me as a conflict where there was no reasonable compromise to be had, though, so in the end, it’s now on both companies’ customers to figure out what to do next.

For users, there are still plenty of other options, including the use of third-party integrations that link the two services together, including Zapier, Automate.io and ShopSync. Indeed, using those is Mailchimp’s recommendation for its current users.

This YC-backed startup preps Chinese students for US data jobs

In recent years, data analysts have gone from optional to a career that holds great promise, but demand for quantitative skills applied in business decisions has raced ahead of supply as college curriculum often lags behind the fast-changing workplace.

CareerTu, a New York-based startup launched by a former marketing manager at Amazon, aims to close that talent gap. Think of it as Codecademy for digital marketing, data analytics, product design and a whole lot of other jobs that ask one to spot patterns from a sea of data that can potentially boost business efficiency. The six-year-old profitable business runs a flourishing community of 160,000 users and 500 recruiting patners including Amazon, Google and Alibaba, an achievement that has secured the startup a spot at Y Combinator’s latest batch plus a $150,000 check from the Mountain View-based accelerator.

In a way, CareerTu is helping fledgling tech startups on a tight budget train ready-to-use data experts. “American companies have a huge demand for digital marketing and data talents these days … but not all of them want to or can spend money on training, and that’s where we can come in,” said Xu, who made her way into Amazon after burying herself in online tutorials about digital marketing.

The gig was well paid, and Xu felt the urge to share her experience with people like her — Chinese workers and students seeking data jobs in the U.S. She took up blogging, and eventually grew it into an online school. CareerTu offers many of its classes for free while sets aside a handful of premium content for a fee. 6,000 of its users are actively paying, which translates to some $500,000 in revenue last year. The virtual academy continues to blossom as many students return to become mentors, helping their Chinese peers to chase the American dream.

CareerTu

Y Combinator founder Paul Graham (second left) with CareerTu founder Zhang Ruiwan (second right) and her team members / Photo: CareerTu

Securing a job in the U.S. could be a daunting task for international students, who must convince employers to invest the time and money in getting them a work visa. But when it comes to courting scare data talents, the visa trap becomes less relevant.

“Companies could have hired locals to do data work, but it’s very difficult to find the right candidate,” suggested Xu. LinkedIn estimated that in 2018 the U.S. had a shortage of more than 150,000 people with “data science skills,” which find application not just in tech but also traditional sectors like finance and logistics.

“Nationalities don’t matter in this case,” Xu continued. “Employers will happily apply a work visa or even a green card for the right candidate who can help them save money on marketing campaigns. And many Chinese people happen to have a really strong background in data and mathematics.”

A Chinese business in the US

Though most of CareerTu’s users live in the U.S., the business is largely built upon WeChat, Tencent’s messaging app ubiquitous among Chinese users. That CareerTu sticks to WeChat for content marketing, user acquisition and tutoring is telling of the super app’s user stickiness and how overseas Chinese are helping to extend its global footprint.

And it makes increasing sense to keep CareerTu within the WeChat ecosystem after Xu noticed a surge in inquiries coming from her homeland. In 2018, only 5 percent of CareerTu’s users were living in China, many of whom were export sellers on Amazon. By early 2019, the ratio has shot up to 12 percent.

Xu believes there are two forces at work. For one, Chinese exporters are leaving Amazon to set up independent ecommerce sites, efforts that are in part enabled by Shopify’s entry into China in 2018. The alternative path provides merchants more control over branding, margins and access to customer insights. Breaking up with the ecommerce titan, on the other hand, requires Chinese sellers to get savvier at reaching foreign shoppers, expertise that CareerTu prides itself on.

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CareerTu offers online courses via WeChat / Photo: CareerTu

Next door, large Chinese tech firms are increasingly turning abroad to fuel growth. Bytedance is possibly the most aggressive adventurer among its peers in recent years, buying up media startups around the world including Musical.ly, which would later merge with TikTok. Indeed, some of CareerTu’s recent grads have gone on to work at the popular video app. Rising interest from China eventually paved Zhang’s way home as she recently set up her first Chinese office in her hometown Chengdu, the laid-back city known for its panda parks and witnessing a tech boom.

Just as foreign companies need crash courses on WeChat before entering China, Chinese firms going global must familiarize themselves with the marketing mechanisms of Facebook and Google despite China’s ban on the social network and search engine.

When American companies growth hack, they make long-term plans that involve “model building, A/B testing, and making discoveries from big data,” observed Xu. By comparison, Chinese companies fighting in a more competitive landscape are more agile and opportunist as they don’t have the time to ponder or test out the different variants in a campaign.

“Going abroad is a great thing for Chinese companies because it sets them against their American counterparts,” said Xu. “We are teaching Chinese the western way, but we are also learning the Chinese way of marketing from players like Bytedance. I’m excited to see in a few years whether any of these Chinese companies abroad will become a local favorite.”

The gaming clips service, Medal has bought Donate Bot for direct donations, and payments

The Los Angeles-based video gaming clipping service, Medal, has made its first acquisition as it rolls out new features to its user base.

The company has acquired the Discord -based donations and payments service Donate Bot to enable direct payments and other types of transactions directly on its site.

Now, the company is rolling out a service to any Medal user with more than 100 followers, allowing them to accept donations, subscriptions, and payments directly from their clips on mobile, web, desktop and through embedded clips, according to a blog post from company founder Pim De Witte.

For now, and for at least the next year, the service will be free to Medal users — meaning the company won’t take a dime of any users’ revenue made through payments on the platform.

For users who already have a storefront up with Patreon, Shopify, Paypal.me, Streamlabs, or ko-fi, Medal won’t wreck the channel — integrating with those and other payment processing systems.

Through the Donate Bot service any user with a discord server can generate a donation link, which can be customized to become more of a customer acquisition funnel for teams or gamers that sell their own merchandise.

Webhooks API gives users a way to add donors to various list or subscription services or stream overlays and the Donate Bot is directly linked with Discord Bot List and Discord Server List as well, so you can accept donations without having to set up a website.

In addition, the company updated its social features, so clips made on Medal can ultimately be shared on social media platforms like Twitter and Discord — and the company is also integrated with Discord, Twitter and Steam in a way to encourage easier sign ups.

Patreon’s future and potential exits

Through the Extra Crunch EC-1 on Patreon, I dove into Patreon’s founding story, product roadmap, business model and metrics, underlying thesis, and competitive threats. The six-year-old company last valued around $450 million and likely to soon hit $1 billion is the leading platform for artists to run membership businesses for their superfans.

As a conclusion to my report, I have three core takeaways and some predictions on the possibility of an IPO or acquisition in the company’s future.

The future is bright for creators

First, the future is promising for independent content creators who are building engaged, passionate fanbases.

There is a surge of interest from the biggest social media platforms in creating more features to help them directly monetize their fans — with each trying to one-up the others. There are also a growing number of independent solutions for creators to use as well (Patreon and Memberful, Substack, Pico, etc.).

We live in an economy where a soaring number of people are self-employed, and the rise of more monetization tools for creators to earn a stable income will open the door to more people turning their creative talents into a part-time or full-time business pursuit.

Membership is a niche market and it’s unclear how big the opportunity is

Patreon’s play is to own a niche category of SMB who it recognizes has particular needs and provide them with the comprehensive suite of tools and services they need to manage their businesses. A large portion of creators’ incomes will need to go to Patreon for it to someday earn billions of dollars in annual revenue.

The market for content creators to build membership businesses appears to be growing, however, membership will be only one piece of the fan-to-creator monetization wave. The number of creators who are a fit for the membership business model and could generate $1,000-500,000 per month through Patreon (its target customer profile) is likely measured in the tens of thousands or low hundreds of thousands right now, rather than in the millions.

To get a sense of the revenue math here, Patreon will generate about $35 million this year from the 5,000-6,000 creators who fit its target customer profile; if you believe this market is expanding at a fast clip, capturing 10% of the revenue (Patreon’s current commission) from 20,000 such creators could bring in $140 million. And that’s without factoring in the potential success of Patreon implementing premium pricing options, which is a high priority. If Patreon can increase its commission from 10% to 15%, it would need around 47,500 creators in the $1,000-$500,000/month range (9.5x its current number) to reach $500 million in revenue from them.

There is a compelling opportunity for a company to provide the dominant business hub for creators, with tools to manage their fan (i.e. customer) relationships across platforms and to manage back-office logistics. At a certain point it taps out though.

That’s one of the reasons why Patreon’s vision includes extending into areas like business loans and healthcare. For companies targeting small and medium businesses like Shopify, Salesforce and Dropbox, there is so much more growth tied to their core products that there is no need for them to consider such unrelated offerings as business loans. Patreon has to both expand its market share and also expand the services it offers to those customers if it wants to reach massive scale.

Patreon faces serious competition but is evolving in the right direction

Patreon is the leading contender in this market, and there’s a role for an independent player even if Facebook, YouTube, and other distribution platforms push directly competing functionality. Patreon will need to make three important changes to compete effectively: more aggressively segment its customers, make the consumer-facing side of its platform more customizable by creators, and build out more lightweight talent management services.

What’s next for Patreon?

Having raised over $100 million in funding over the last six years, what is the path to a liquidity event for investors and employees? 

In a worst case scenario, it is unlikely the company would go out of business even if it fell into disarray because it would be strategic for several large companies to takeover at a discount. Patreon may be on the path to IPO (as CEO Jack Conte hopes), but I find it more likely that the company gets acquired sometime in the next couple years.

Path to IPO?

If a public offering is in Patreon’s future, it’s several years out. It now defines itself as a SaaS company and has a plan to earn a higher blended commission on the sales of its customers through premium pricing options. It is a frequently misunderstood company, however, and needs to prove that a big market exists for mid-tail creators building membership businesses. 

According to a summary by Spark Capital’s Alex Clayton, SaaS companies who went public in 2018 typically:

    • had $100-200 million in revenue over the prior twelve months,
    • were 14 years old,
    • had an average year-over-year revenue growth rate of ~40%,
    • earned 90% of revenue from subscriptions,
    • had a median gross margin of 73%,
    • ranged from roughly 500 to 2500 employees,
    • had a raised a median of $300 million in VC funding,
    • and IPO’d with a median market cap of $2 billion

Public market companies to benchmark it against will be Shopify (as SaaS infrastructure for small businesses selling to, and managing payments from, consumers) and Zuora (Patreon can be viewed as a media-specific SMB alternative to Zuora’s “Subscription Relationship Management” system). Compared to Shopify, whose market of SMB e-commerce businesses globally is easily understood to be enormous, Patreon would face more skepticism from public investors about the market size of mid-tail content creators.

Patreon’s gross margins can’t be much more than 50% given that almost half of revenue is going toward payment processing. Patreon mirrors Shopify’s topline revenue growth in the run up to its 2015 IPO: Shopify reported $23.7 million for 2012, $50.3 million for 2013, $105 million for 2014 and I estimate Patreon brought in $15 million for 2017, $30 million for 2018, and will hit $55 million for 2019. Most of Shopify’s revenue came from subscriptions, however, with only 37% coming from the “merchant solutions” services where Shopify had to pay out payment processing fees. Patreon’s revenue net of payment processing fees is closer to $7.5 million for 2017, $15 million for 2018, and $27 million (predicted) for 2019.

There’s a lot of capital chasing late-stage startups right now. How long that remains the case is unknown, but Patreon can likely raise the funding to operate unprofitably a few more years — getting topline revenue closer to $150-200 million, proving creators will adopt premium pricing, and showcasing its ability to compete with Facebook and YouTube in a growing market. In that case, it could become a strong IPO candidate.

The acquisition route

The other scenario, of course, is that a larger company buys Patreon. In particular, one of the large social media platforms building directly competitive features may decide it is easier to buy their expansion into membership than build it from scratch. Patreon is the dominant platform without any noteworthy direct competitor among independent companies, so acquiring it would immediately put the parent company in a market-leading position. Competing social platforms wouldn’t have another large Patreon-like startup to acquire in response.

There are three companies that jump out as both the most likely acquirers. Each of these M&A scenarios would be mutually beneficial: advancing Patreon’s mission and providing strategic value to the parent. The first two companies are probably obvious, but the last one may be less known to TechCrunch readers.

Facebook

I highlighted Facebook as the top competitive threat to Patreon. This is also why it’s a natural acquirer. Patreon would bring fan relationship management to the Facebook ecosystem and particularly the company’s Creator App with CRM and analytics specifically fit for creators’ needs. It would also bring a stable of 130,000 creators of all types to make Facebook the primary infrastructure through which they engage their core fans.

Facebook is prioritizing human relationships more and clickbait content less. A natural replacement for the flood of news articles and viral videos is deeper engagement with the creators that Facebook users care the most about.

Since the annual churn rate of Patreon creators who earn $500 per month or more is under 1%, the ~9,200 creators who fit that category would likely stick around as Patreon’s infrastructure integrates with Facebook’s; the vast majority probably already have Facebook pages and possibly use the Creator App.

Facebook’s data on who fans are, what they like, and who their friends are is unrivalled. The insights Facebook could provide Patreon’s creators on their fans could help them substantially grow their number of patrons and build stronger relationships with them.

Like all major social media platforms, Facebook has partnership teams vying to get major celebrities to use its products. Patreon could lock the mid-tail of smaller (but still established) creators into its ecosystem, which means more consumer engagement, more time well spent, and more revenue through both ads and fan-to-creator transactions. Owning and integrating Patreon could have a much bigger financial benefit than solely revenue from the core Patreon product.

As a Facebook subsidiary, Patreon would stick more closely to being a software solution; it wouldn’t develop as robust of a creator support staff and the vision that it may expand to offer business loans and health insurance to creators would almost surely be cut. Facebook would also probably discontinue supporting the roughly 23% of Patreon creators who make not-safe-for-work (NSFW) content.

Given Patreon’s mission to help creators get paid, it may make a bigger impact as part of Facebook nonetheless. Facebook’s ecosystem of apps is where creators and their fans already are. Tens of thousands of creators could start using Patreon’s CRM infrastructure overnight and activating fan memberships to earn stable income.

A Facebook-Patreon deal could happen at any point. I think a deal could just as likely happen in a few months as in a few years. The key will be Facebook’s business strategy: does it want to build serious infrastructure for creators? And does it believe paywalled access to some content and groups fits the future of Facebook? The company is experimenting with both of those right now, but doesn’t appear to be committed as of yet.

YouTube

The other most likely acquirer is Google-owned YouTube. Patreon was birthed by a YouTuber to support himself and fellow creators after their AdSense income dropped substantially. YouTube is becoming a direct competitor through YouTube Memberships and merchandise integrations.

If Patreon shows initial success in getting creators to adopt premium pricing tiers and YouTube sees a strong response to the membership functionality it has rolled out, it’s hard to imagine YouTube not making a play to acquire Patreon and make membership a priority in product development. This would create a whole new market for it to dominate, making money by selling business features to creators and encouraging fan-to-creator payments to happen through its platform.

In the meantime, it seems that YouTube is still searching for an answer to whether membership fits within its scope. It previously removed the ability for creators to paywall some videos and it could view fan-to-creator monetization efforts as a distraction from its dominance as an advertising platform and its growing strength in streaming TV online (through the popular $40/month YouTube TV subscription).

YouTube is also a less compelling acquirer than Facebook because the majority of Patreon’s creators don’t have a place on YouTube since they don’t produce video content (as least as their primary content type). Unless YouTube expands its platform to support podcasts and still images as well, it would be paying a premium to acquire the subset of Patreon creators that it wants. Moreover, as much as a quarter of those may be creators of NSFW content that YouTube prohibits.

YouTube is the potential Patreon acquirer people immediately point to, but it’s not as tight of a fit as Facebook would be…or as Endeavor would be.

Endeavor

The third scenario is that a major company in the entertainment and talent representation sphere sees acquiring Patreon as a strategic play to expand into a whole new category of talent representation with a technology-first approach.  There is only one contender here: Endeavor, the $6.3 billion holding company led by Ari Emanuel and Patrick Whitesell that is backed by Silver Lake, Softbank, Fidelity, and Singapore’s GIC and has been on an acquisition spree.

This pairing shows promise. Facebook and YouTube are the most likely companies to acquire Patreon, but Endeavor may be the company best fit to acquire it.

Endeavor is an ecosystem of companies — with the world’s top talent agency WME-IMG at the center — that can each integrate with each other in different ways to collectively become a driving force in global entertainment, sports and fashion. Among the 25+ companies it has bought are sports leagues like the UFC (for $4 billion) and the video streaming infrastructure startup NeuLion (for $250 million). In September, it launched a division, Endeavor Audio, to develop, finance and market podcasts.

Endeavor wants to leverage its talent and evolve its revenue model toward scalable businesses. In 2015, Emanuel said revenue was 60% from representation and 40% from “the ownership of assets” but quickly shifting; last year Variety noted the revenue split as 50/50.

In alignment with Patreon, Endeavor is a big company centered on guiding the business activities of all types of artists and helping them build out (and maximize) new revenue streams. When you hear Emanuel and Whitesell, they reiterate the same talking points that Patreon CEO Jack Conte does: artists are now multifaceted, and not stuck to one activity. They are building their own businesses and don’t want to be beholden to distribution platforms. Patreon could thrive under Endeavor given their alignment of values and mission. Endeavor would want Patreon to grow in line with Conte’s vision, without fearing that it would cannibalize ad revenue (a concern Facebook and YouTube would both have).

In a June interview, Whitesell noted that Endeavor’s M&A is targeted at companies that either expand their existing businesses or ones where they can uniquely leverage their existing businesses to grow much faster than they otherwise could. Patreon fits both conditions.

Patreon would be the scalable asset that plugs the mid-tail of creators into the Endeavor ecosystem. Whereas WME-IMG is high-touch relationship management with a little bit of tech, Patreon is a tech company with a layer of talent relationship management. Patreon can serve tens of thousands of money-making creators at scale. Endeavor can bring its talent expertise to help Patreon provide better service to creators; Patreon would bring technology expertise to help Endeavor’s traditional talent representation businesses better analyze clients’ fanbases and build direct fan-to-creator revenue streams for clients.

If there’s opportunity to eventually expand the membership business model among the top tiers of creators using Patreon.com or Memberful (which Conte hinted at in our interviews), Endeavor could facilitate the initial experiments with major VIPs. If memberships are shown to make more money for top artists, that means more money in the pockets of their agents at WME-IMG and for Endeavor overall, so incentives are aligned.

Endeavor would also rid Patreon of the “starving artist” brand that still accompanies it and could open a lot of doors in for Patreon creators whose careers are gaining momentum. Perhaps other Endeavor companies could access Patreon data to identify specific creators fit for other opportunities.

An Endeavor-Patreon deal would need to occur before Patreon’s valuation gets too high. Endeavor doesn’t have tens of billions in cash sitting on its balance sheet like Google and Facebook do. Endeavor can’t use much debt to buy Patreon either: its leverage ratio is already high, resulting in Moody’s putting its credit rating under review for downgrade in December. Endeavor has repeatedly raised more equity funding though and is likely to do so again; it canceled a $400M investment from the Saudi government at the last minute in October due to political concerns but is likely pitching other investors to take its place.

Patreon has strong revenue growth and the opportunity to retain dominant market share in providing business infrastructure for creators — a market that seems to be growing. Whether it stays independent and can thrive in the public markets sometime or whether it will find more success under the umbrella of a strategic acquirer remains to be seen. Right now the latter path is the more compelling one.

States will be able to charge sales tax on online purchases thanks to the Supreme Court

In a five-to-four decision issued today, the Supreme Court ruled that states can make online businesses collect sales taxes — even if they don’t have a physical presence in that state.

Today’s ruling overturns a decision from the Court in 1992 that paved the way for the explosion of online retail in the United States.

At issue was the Quill Corp. v. North Dakota decision, which ruled that companies need to have at least some physical connection with a state for that state can require that company to pay taxes.

Today’s ruling caused publicly traded e-commerce companies share prices to tumble, with Shopify, Etsy, Amazon, eBay, Alibaba all recording losses in midday trading on their respective U.S. exchanges.

It’s a huge win for vendors with physical storefronts which have long argued that their online counterparts enjoyed an unfair advantage since they didn’t have to charge customers local sales tax. Local governments may also see a windfall as a result of the ruling, since the government estimates that between $9 billion and $13 billion in potential tax revenue is left on the table, thanks to earlier Supreme Court decisions on the taxation of online purchases.

Writing for the majority, Justice Anthony Kennedy said:

“Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own. This “guarantees a competitive benefit to certain firms simply because of the organizational form they choose” while the rest of the Court’s jurisprudence “is all about preventing discrimination between firms.” … In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced.”

While the ruling opens the door for states to collect taxes from online businesses, there’re some significant outstanding questions now that the court has made its decision.

First, the court did not rule out the possibility that states may not collect taxes on all online purchases, given the negligible size of some transactions. And the court didn’t say whether states could retroactively seek sales taxes.

That’s a big issue, considering that e-commerce sales in the U.S. were $435.5 billion last year, vs. $180 billion in mail-order sales in 1992 when the court issued its first ruling on interstate sales and taxes.

For most large online retailers (including Amazon — the country’s largest), the decision will have little impact, since they’ve been voluntarily paying state sales taxes for years. Instead, the burden will be on earlier stage companies that don’t have the same sort of scale and who will be facing more operational costs as a result.

“Generally of the opinion that it’s not going to have a major impact on the larger e-commerce companies as many have already been collecting state sales tax for years,” wrote one venture capital investor whose firm is heavily invested in e-commerce. “The burden is going to higher on SMBs because of the admin work required for each state — there is /will be software to simplify this, but nonetheless the impact is going to be greater on the smaller/high growth e-commerce companies,” the investor said.

Chief Justice John Roberts agrees. In his dissenting opinion, Roberts wrote:

The burden will fall disproportionately on small businesses. One vitalizing effect of the Internet has been connecting small, even “micro” businesses to potential buyers across the Nation. People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country—but probably not if they have to figure out the tax due on every sale. See Sales Taxes Report 22 (indicating that “costs will likely increase the most for businesses that do not have established legal teams, software systems, or outside counsel to assist with compliance related questions”). And the software said to facilitate compliance is still in its infancy, and its capabilities and expense are subject to debate.