AI's missing revenue, and how Beehiiv plans to scale on the cheap

Welcome to Cautious Optimism. Today is July 8th, 2024. Let’s talk tech, markets, and how Beehiiv is turning heads in venture-land.

The Rundown

• 📈 Trending Up: Epic, in its never-ending battle with Apple … pro-rata funds … Paramount + Skydance … press freedom … the French right-wing, though less than expected … Lewis Hamilton, Mclaren, Haas … contra-China military prep …

• 📉 Trending Down: U.S. energy dependence … corporations paying meaningful fines … Russian isolation … peace in the Philippines’ EEZ … Delivery Hero’s checking account … semiconductor investment in China …

• 📊 Upcoming economic data: U.S. consumer credit on Monday, jobless claims and inflation data on Thursday, new producer price index metrics on Friday. Elsewhere, Mexican auto exports and Chinese inflation on Tuesday, South Korean rate decisions on Wednesday, British GDP on Thursday, and Indian inflation data on Friday.

• 💸 Upcoming business data: Pepsi, Progressive, Wipro, and Delta earnings on Friday.

• 🤔 What else? Microsoft has started to block staff from using Android in China. It’s also not talking about why. For context around the choice, Bloomberg writes that the company is “ramping up security worldwide after incurring repeat attacks from state-sponsored hackers.” Put one and one together here and the why becomes pretty simple to suss out.

• And this Sequoia essay is making the rounds — AI hardware investment is so hot at the moment that there’s a massive, half-trillion dollar revenue gap forming. I continue to worry about equity capital used to build models that are deprecated in a half year, which nests into the piece’s thesis.

Via Wolfgang Hasselmann

The Essay: How Beehiiv plans to keep growth hot and its costs cool

When putting Cautious Optimism together, I was torn between staying on Substack — more here — and moving to Beehiiv. Substack, you already know. Beehiiv is younger, has a different business model, and is growing very quickly.

Its model is focused on SaaS revenues and other incomes, in contrast to Substack’s revenue-sharing setup. That approach appears to be resonating in the market, so much so that the company raised a large Series B earlier this year.

More recently, Beehiiv announced that it crossed the $10 million annual recurring revenue threshold.

To learn more about how the company reached that critical revenue milestone, and how it intends to keep growing in a competitive market, I caught up with its co-founder and CEO, Tyler Denk. (You can read his newsletter, Big Desk Energy, here.)

Denk told CO that Beehiiv’s SaaS business — the fees it charges to use its software — is growing around 10 to 15% per month. The CEO also said that an upcoming pricing change set to arrive in August could contribute another 10 to 15% to its SaaS revenues, even taking into account “conservative” churn expectations.

But while Beehiiv may be best known for its SaaS model in contrast to Substack’s own monetization methods, it does more. Denk told CO that his company’s fastest-growing revenue segment is its ad network.

To Denk, that advertising product is both Beehiiv’s “pet project” and its “big home-run swing.” Reflecting on his time at business newsletter juggernaut Morning Brew, Denk said that he learned that to “get paid” you must have a large in-house team to handle brand partnerships and sales. It’s a lot of work, he argued, to collect data, talk to agencies, and land deals.

Too much work, in fact, for a small newsletter. What Beehiiv wants to do is offer the Morning Brew advertising engine to more publications, and get paid at the same time.

“We can bring [a similar] level of ad opportunity at high CPM [and] CPCs” to newsletters on Beehiiv, he said. Calling the advertising product a win-win thanks to its ability to offer advertisers access to “niche audiences and emails” — that are, therefore, very targeted — while publishers get paid without having to do the sales and partnership work, Beehiiv’s ads business is nearing the half-million dollar mark in monthly turnover. The company takes a cut that ranges from zero to 20% depending on the advertiser.

The third leg of Beehiiv’s business model is its Boosts product, which Denk likened to the positive result of “network effects.” In essence, through Boosts, a newsletter can offer a fee to other newsletters to promote itself and help it grow. Beehiiv, as you might expect, gets a cut of that spend.

SaaS + ads + Boosts = the way that Beehiiv keeps its growth flowing.

Notably, however, the company isn’t planning on greatly expanding its team as it looks to continue scaling. Recall that the company raised $33 million in April, an event that would normally herald an incoming wave of hiring. Not so, according to Denk.

In response to CO’s query of how large the company’s currently 75-person team would grow to this year, Denk repsonded that he is:

“the anti-Series B. We're not spending more money. We're not hiring more people. I think we run extremely lean. We have 75 people now. [At our recent] offsite, I presented a Q3 roadmap of where we're going, and one of the slides said ‘we are not hiring.’ I know [there are] exceptions to that, but the goal is not to actually grow. We'll probably grow three to five in Q3, [and] maybe 4 to 5 more [Q4]. Under 90 is the goal for the year.”

The CEO went on to note that Beehiiv has $40 million in the bank and a burn rate of about half a million dollars per month, which will come down as the company grows. So instead of having 80 months of runway, the company probably has more. Fast growth, endless runway, and plans to keep costs low? Beehiiv could be the model company for today’s venture vibes.