Interview with CEO of Zoosk

Atul Bagga, the gaming analyst at the investment bank ThinkEquity, published an interesting research report today where he interviewed the CEO of Zoosk. I am republishing it here with his permission:

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THINK SUMMARY: We had a chance to speak with Shayan Zadeh, the co-founder and co-CEO of Zoosk, a multi-channel dating service with presence on social networks, online, iPhone, mobile Web, and a desktop application, revenue growing at 20% M/M, and with revenue at more than $2.5 million per month. Zoosk differentiates itself from the traditional dating sites by focusing on relatively younger audience and monetizing users through subscription and virtual currency. The company expects to maintain growth momentum in 2010 through more-aggressive user acquisition, international expansion, and a couple new products. KEY POINTS:

• Zoosk is a multi-channel global online dating service with presence on major social networks, online, mobile Web, iPhone application, and desktop client with 50 million registered users/14 million monthly unique users, a $2.5 million monthly revenue run-rate (as of October 2009) and a 20% month/month revenue growth. The company expects its revenue to be more than $200 million by 2011.
• Since Zoosk uses social media and online as user acquisition channels, it has been able to establish a more-global footprint compared to other dating service sites. Zoosk’s user breakup is equally split between the United States, Western Europe, and rest of the world, and the top six or seven countries make up the majority of revenue.
• Since Zoosk doesn’t focus on traditional success metrics for its dating service (i.e., marriage), its service appeals to younger audience, and 90% of its audience is younger than 40 years old and 60% is younger than 30 years versus the 38-50 years sweet spot for most other dating sites, according to Zadeh.
• Zoosk uses virtual currency and subscription model to monetize its users, with subscription contributing a major portion of revenue. Conversion rates are in double digits for subscription and higher for virtual currency.
• While social networks used to be the largest channel for customer acquisition, Zoosk sees a much-bigger audience outside social networks and is now getting more users directly on its destination site via search, display advertising.
• Since 2007, the company has acquired a chunk of its user base from social networks at nominal cost, and the window for this acquisition channel is now closed, according to Zadeh. He said that creating this size of user base could be very expensive for an incumbent and represents a major entry barrier.

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Atul Bagga, ThinkEquity (AB): Please explain your business and why should investors care about Zoosk?

Shayan Zadeh, Co-CEO, Zoosk (SZ): Zoosk is an online dating service that serves users through numerous channels. We are present on all of the major social networks; we have our destination site on Zoosk.com; we have our mobile Web property, and an iPhone application, and we have a desktop client. From an investor’s perspective, Zoosk is interesting in a few ways. First, Zoosk is the only global online dating company at this scale. The dating business has traditionally been a very local business because user acquisition was usually through old media, which required a lot of expertise in offline advertising conditions in each geographic market. So you have companies like Match.com and eHarmony that are very strong in the United States, Meetic in Europe, RSVP in Australia, and so on. For the first time, we have leveraged social media to get a global reach without having an office in each country that we are presently active in. We are monetizing in 52 countries right now with the service localized in 20 languages.

The second thing that sets us apart is that we approach dating from a different perspective. Usually the success metric for the industry is the quantity of marriages, and how fast your users get married, which ironically results in losing those customers. At Zoosk, we want to give you the choice. If you want to just date that’s absolutely fine with us, and the product doesn’t force you to think about marriage. Because of this positioning, we appeal to younger audiences. We see a lot of users coming back to the site, subscribing, and using the service again.

Finally, our business model is very innovative in the online dating space. While the gaming industry has adopted a hybrid virtual currency slash subscription model for a long time, this is the first time that we are doing it in a dating context, which helps us to maximize customer value by offering services in a la carte fashion, with coins in addition to subscription.

Zoosk was founded in Jan. 2007, and we launched the product in December 2007, and so far we have raised $40 million from investors like ATA Ventures, Canaan Partners, Bessemer, and Amidzad Ventures.

AB: What is the target audience for Zoosk?

SZ: Ninety percent of our users are younger than 40 years old, 65% are younger than 30 years old. This is very different from the normal 38-50 years sweet spot for most traditional sites in the dating industry. And that is a function of two things (a) our positioning, and (b) our acquisition channels. Not a lot of 20-somethings are glued to their TVs, which makes it hard for Match.com, as an example, to reach a 28-year-old living in San Francisco, whereas through Facebook and MySpace, it’s a lot easier for us to do that.

In terms of geographic distribution, a third of our users come from the United States, another third come from Western Europe, and then the remaining countries make up the last third.

AB: Is the revenue distribution in line with the traffic distribution or is that more lopsided towards the U.S. and Western Europe?

SZ: The top six or seven countries make up the lion share of the revenue. Our pricing is localized, so it’s GDP-adjusted. So a user in Mexico doesn’t contribute as much as a user paying in the United States or Canada. We see a lot of opportunity in emerging markets where we are basically laying the seeds.

AB: You mentioned that you monetize your audience through virtual goods and subscription. Do you also do any advertising?

SZ: We used to do advertising, but we pulled it off during the downturn in the advertising market over the past couple of years. We are looking at this again this year to see if we can add to the monetization without disturbing the user experience.

AB: What’s the breakup of revenue between virtual currency and subscription revenue now?

SZ: Subscription is the lion’s share of the revenue. Virtual currency just fills up the gaps. We had virtual currency from day one, but it was only in the form of virtual gifting. Since the summer of 2009, we started adding a lot more product features for users who want to use the virtual currency and that’s when the virtual currency became a more-meaningful part of our revenue. Even our subscribers use virtual currency, so it’s not a mutually exclusive universe.

AB: What is conversion rate from free users to paying subscribers and those paying for virtual currency?

SZ: We’re in double digits, percentage-wise for subscription and obviously the volume on the virtual currency transactions are much higher than subscription because of repeat purchases.

AB: How does the conversion compare on different platforms? Can you help us understand the users propensity to spend on Zoosk.com versus on Facebook application, versus iPhone application?

SZ: One of the cool things about Zoosk is that for a user, all of their accounts are connected in this ecosystem and they can log into their account from Facebook or from Zoosk.com; or from the iPhone. What we have found is that the monetization usually happens on Zoosk.com. That doesn’t mean that users who sign up on Facebook don’t monetize. It means that users who sign up on Facebook also use Zoosk.com and usually when they have intent to pay they come directly to Zoosk.com for that experience.

AB: You mentioned that the social networks have helped you a lot in terms of distribution. Is that the primary user acquisition channel or do you also use other online or offline campaigns for user acquisition?

SZ: We haven’t done offline campaigns yet, so the user acquisition is a combination of online advertising and viral growth on social networks. Social networks used to be our largest channel of customer acquisition. That has changed significantly over the past year or so. We have put a lot more emphasis on the destination site and it’s working great for us. Now, instead of coming from Facebook and going to Zoosk.com, users go to Zoosk.com and then they add their Facebook account to their Zoosk.com account. We are looking at offline channels for user acquisition in 2010.

AB: Can you talk about the reasons? What changed last year that your acquisition shifted from Facebook to your site? Is this a reflection on the saturation on Facebook?

SZ: We are still acquiring very aggressively on Facebook and other social networks, but what we have realized is that the universe outside of social networks is orders of magnitude larger. Our goal is to become a global online dating company, and we look at social networks as one of the distribution channels. We want to be on search, on display advertising, on offline channels. So it was a strategic shift for us to start focusing more on our destination site.

AB: Outside of Facebook, what other social networks are generating traction for Zoosk?

SZ: I will say MySpace, Hi5, Friendster, and Bebo. We recently started a partnership with IMVU, and we are looking to get on some other properties.

AB: How big do you think the market for dating applications could be?

SZ: I think analysts peg the industry size at $1.0-1.5 billion for the U.S. market and $4 billion worldwide. We think that we can expand that market significantly by targeting a younger audience that are potentially going to being dating for 10 years before they choose to settle down.

AB: What is the average lifetime value of a user on your platform? How long does a user remain with Zoosk after the initial sign up?

SZ: That’s one of the interesting things about Zoosk and how it’s different from traditional online dating sites like Match.com. In our company’s life, we have had about 50 million people sign up for Zoosk, and last month alone we had about 14 million unique visitors, which suggests an uncharacteristic stickiness compared to traditional online dating sites. The reason for it (a) our audience is a lot younger and so they date for longer, and (b) the positioning of Zoosk as a social network for singles.

AB: I was just doing some mental math. You said 14 million active last month, and you mentioned that your conversion is more than 10%. Does that mean you have more than 1.5 million paying subs?

SZ: Given the design of the product and tight integration with social networks, we have a very wide funnel. Fourteen million users were at the top of this funnel last month. We measure the conversion rate further down the funnel once the user shows more engagement with the service in order to make our metrics comparable with the industry standards.

AB: Who do you see as potential competitors? What makes it difficult for someone to replicate what Zoosk has done so far?

SZ: I think that a major barrier to entry in this business is the size of our user base. In 2007, we rode the wave of social network platforms to grab a huge market share with low acquisition costs. That window doesn’t open every day and now that window has closed down again. The barrier to entry for online dating is to get to a critical mass without spending millions of dollars in marketing. In terms of competition, we recently crossed Match.com in traffic in the United States according to comScore. Next up is to catch up with them in terms of revenue numbers.

AB: What are your major growth drivers in 2010?

SZ: There is a lot of product innovation happening right now that will help us hit our goals. We’re also accelerating our acquisition through online and offline advertising, which will be a brand new territory for us in 2010. There is a lot of room for us to grab more market share in existing markets, and also places like Germany where we are starting; and Asia could be another big opportunity for us.

AB: What is your product roadmap that you talked about?

SZ: Our desktop client will play a big role and also rich mobile applications, with iPhone being the starting point. We see a lot of traction in those areas to be able to expand on what we have.

AB: Are you offering any location-based dating service on iPhone or other smart phones?

SZ: We are not doing location-based dating right now. We have seen it fail multiple times. It has a lot of privacy issues attached to it. For us, rich mobile applications such as the iPhone application are an extension of our service, and we have found a lot of users who use Zoosk.com also use it on their iPhone when they’re on the go, so it’s additional value to them. So the draw has been mobility more than location awareness.

AB: How big might Zoosk be, and how fast is it growing?

SZ: We are about 50 people. In October 2009, we announced that we were at $30 million on a run rate basis, and we have grown quite significantly since then. In 2009, we had a consistent 20% month-over-month revenue growth and we’ve been able to continue and even surpass that growth rate since then, so the sky is the limit right now.

AB: What’s your outlook for 2010? Do you expect the same growth throughout the rest of the year?

SZ: So far it looks like that. Revenue for the top three online dating companies hovers between $200-300 million, and our goal it to surpass that in 2011.

AB: What do you see as big challenges for Zoosk over the next two or three years?

SZ: The next three years is all about execution. 2008 and 2009 was about finding the right market fit, to position our product, to acquire users and to become profitable. 2010 and 2011 is going to be execution; scaling the business, scaling the revenue run rate, and continuing to be as efficient as we have been so far.

AB: Where do you see Zoosk three years from now? Do you see yourself as a public company, as a standalone private company or as a part of a bigger platform?

SZ: We are looking at building a billion-dollar business over the next couple of years and depending on the market conditions, a public company. Becoming a global leader in online dating is definitely in our sight, and that’s really the de facto plan for us right now.
AB: Thank you so much for speaking with us, Shayan.