One of the most ambitious subscription startups is bankrupt! What can we learn from the collapse of Simple Feast?

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Subscription POV #35

Af Morten Suhr Hansen

After many years of uninterrupted success, the subscription movement is at an interesting crossroads. For years I’ve been writing about how the valuations of subscription startups have been through the roof. The faith of investors that a growing subscription business was an almost guaranteed success seems to have come to an end. And more and more companies threw themselves into the battle for subscribers along with all the exciting startups.

But now, it seems the curve has been broken. The subscription pioneer and stock market darling Netflix has lost 62% of its market value since the beginning of 2022 and just 10 days ago, one of Denmark’s most ambitious subscription projects, the meal box subscription Simple Feast, went bankrupt after a deficit of more than 88 million DKK.

What is it that we’re experiencing right now? Are subscription companies especially challenged right now? Is the subscription business threatened for the first time in many years?

A frozen financial market is a giant obstacle for growth companies

To answer this question, it’s important to split the discussion in two. First, the challenge around a frozen financial market and second, the challenge of consumer trust in subscriptions and subscription companies.

To illustrate the first part, we can look again at Simple Feast. It is important to highlight that the deficit cannot be attributed to a lack of interest in subscriptions or environmental and healthy meal box concepts.

Simple Feast had turned to a very expansive growth strategy which demanded a lot of money from investors. And while the financial markets were still hot, they had no problem collecting high risk investments. Newspaper Børsen describes the situation for money-hungry startups like this:
“While a few years ago, startups could easily attain capital, burn millions and collect billions at sky-high valuations, today, it’s another reality. Costs need to be kept low and investors are moving to startups where new customers are easier to obtain.”

Actually, Simple Feast has been able to raise 500 million DKK in capital since 2015. That money has now come and gone.

Evidently, Simple Feast, who recently tried out the American market, was never meant to reach a net zero anytime soon. So it is in no way the business model or the product that killed Simple Feast. It is the new economic reality where the access to risk-averse capital has been reduced heavily.

This also means that many other growth-driven startups, subscriptions or not, will face considerable problems in the coming months if they don’t manage to limit the rate with which they burn money. This is especially true for consumer-focused subscription companies, since the uncertainty of the market comes from a very low consumer-trust, which brings me to my next point.

Low consumer trust is putting pressure on all subscription companies

In Denmark, consumer trust is the lowest we have ever measured. The same goes for almost the entire Western world as the war in Ukraine escalates, inflation is sky-high and an energy crisis is luring in the horizon.

This also means that most consumer-faced companies experience a pressure in these months. This is not only true for subscription companies, but all companies. Last week, Dansk Erhverv published the yearly e-commerce analysis and for the first time ever, the total e-commerce spend is falling! In other words: Consumers are holding back on spending.

Companies that work solely with subscriptions experience that it is much harder to find new customers now than it was one or two years ago (where the pandemic actually resulted in the opposite effect). However, there is still much that suggests that subscription companies are faring better than more traditional businesses, because the subscription-based business model in its very nature is better at retaining customers and revenue.

This offers little consolation for companies who are experiencing a decline. Along with the frozen financial market this is also the reason why more and more investors are hesitant with new investments.

Simultaneously, we now see a small effect of consumers becoming more aware when it comes to assessing whether a subscription is essential or not. This, naturally, doesn’t help either.

The best and the biggest can win in a challenging market

My guess is that in the present climate, there are two types of winners when it comes to subscription. First of all, companies who are used to making money are rewarded. Companies who are self-financed and have equity capital to rely on or is able to produce satisfactory accounts even though they are smaller than they are used to. Secondly, the market leader will do better than challengers. If we’ve been used to subscribing to more than one meal box subscription or having several streaming services, most subscribers will choose to cut a few instead of leaving all of them.

At the same time, subscription companies with a strong value offer, a strong and loyal relationship with customers and competencies in working with subscribers throughout lifetime will have a clear advantage.

In other words, the strongest and best companies stand to win market share in a challenging market.

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