Behind the Deal: Pelcro
We’ve built a diverse team at Front Row Ventures, ranging from AI PhDs to undergrads in Liberal Arts. For most of the companies we meet with, it means there’s someone on the team who has some experience in that field. My background is in marketing, from my time as a Marketing Associate at Busbud and my current position as Marketing Director at Seahub, which is why I decided to lead our due diligence in Pelcro.
In late 2017 I met Michael, CEO of Pelcro, and quickly connected with him on a shared vision of how the online publication model will evolve over time. We were both aware of the conversation around how much Adblock was hurting these publications, but saw this as one layer of a broader issue preventing publications from reliably generating revenue from advertising. Researching the issue more, I started to see three central problems that publications were facing.
1. Online advertising has disrupted the media publication business model
Newspapers and magazines no longer own distribution. 20 years ago, if you wanted to reach a large number of people, your main options were print or TV. Now, Facebook, Google and other social networks own the distribution so advertisers prefer going directly to them.
Ad inventory is no longer a scarce resource. The number of publications online has skyrocketed over the last 10 years, and ad inventory is essentially unlimited on sites like Facebook and Google as they aren’t in fixed spots.
Targeting capabilities for ad inventory on online publications are uncompetitive. Because the value of ad inventory has dropped, the value of ads is determined more and more by the precision of the targeting. Facebook and Google quite obviously offer much better solutions than publications.
The result is domination by Google and Facebook in online advertising. They already control a majority share of online ad revenue, and now control most of the growth in online advertising as well (89%). Essentially, online publications are losing their advertising revenue to Google and Facebook due to a shift to digital that the publications aren’t optimized for.
2. The little advertising revenue left is being cut by Adblock
Adblock adoption is rapidly rising and still has a lot of room left to grow, which can result in a ~30% revenue loss for online publications that rely on ads to make revenue.
Coupled with the rise of Facebook and Google, Adblock has made it unsustainable for many online publications to rely on advertising as their primary revenue source. Even Buzzfeed, a massive site that is built to drive traffic, missed its revenue targets by 15–20% in 2017.
3. Publishers are trying to transition to subscription revenue, but most are struggling
Subscription publications are growing fast — in the USA, the proportion of people aged 18–24 paying for online news rose from 4% in 2016 to 18% in 2017. Although some big players like the NYT have been able to execute this successfully, it’s a challenge for most small and medium-sized publications.
The result is that while subscription offers more reliable and sustainable revenue, most online publications aren’t able to use it.
Pelcro’s Solution
Pelcro is a data-driven platform that allows publishers to earn subscription revenue without the costs of setting it up and managing it. Once a user pays for a subscription to the Pelcro network, they get premium access to all the sites that have partnered with Pelcro. Their subscription fee is then split among all the sites the user visited based on how much the user viewed that site, on which Pelcro earns a commission.
Pelcro uses their own machine learning algorithms to predict which users are likely to opt-in to a subscription. Rather than putting a hard paywall that causes many users to leave, they’ll only ask the users who are likely to pay to subscribe.
For users, they offer an easy way to pay for content without having to pay each site’s subscription fee. As more sites transition to the subscription model, it’s unsustainable for the user to separately have to put their credit card in on each site just to access content.
Our Investment
Michael has built a strong team to execute on this vision, proven by the hundreds of paying users they’ve been able to get on the platform. Andrew, COO and recent McGill graduate, brings strong sales acumen to the table, and their CTO Elyad brings over a decade of experience in software engineering to build out the platform.
The nature of Front Row Ventures is that we invest earlier and take on more risk than other VCs are willing to take. To compensate for that risk, we can only invest in companies with exceptional upside potential. For Pelcro, strong network effects and a total addressable market that encompasses most online media made the investment decision clear. Pelcro could become the operating system behind an industry transition to subscription revenue, and we’re glad to be supporting them on the way there.
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