3 Things: Algolia for Recommendations, Substack with Dynamic Ads, SCIN SaaS

Happy Sunday and apparently today is the Superbowl so I hope whichever team you’re rooting for wins! I’m thrilled and honored to have you as readers and truly appreciate your thoughts and feedback 🙏. Each edition of 3 Things will contain a dive into 3 rabbit holes I’ve found myself going down recently and associated business opportunities. Subscribe to get each week’s edition straight to your inbox and if you enjoy it, please share (I suck at self-promotion so can use your help)! This past week I’ve been thinking a lot about:

• Algolia for Recommendations

• Substack With Dynamic Ads

• SCIN SaaS

1. Algolia for Recommendations

Most of our experiences on the internet can be classified as either intent-based or recommendation-driven. If we take online shopping as an example, you might be in the market for a little black dress and start your search either on Google or directly on a brand website where you type in the description of what you’re looking for and you’re presented with items that fit the query. This is intent-based, but then if you click on an item, you’ll likely see suggestions of other items that go well with that dress or goods that other people who purchased that dress also bought. In this case, the company is recommending you things that you didn’t directly search for to try and increase your basket size and help with discovery. When it comes to intent-based inquiry, most companies have adopted a 3rd party tool like Algolia or Elasticsearch which is embedded in their site to superpower user search. Algolia has raised over $330m for top VCs and does over $75m in annual revenue across ~6k customers.

Whether it’s dating apps trying to recommend potential matches, streaming services trying to predict which content you’ll like, e-commerce sites attempting to get you to make a purchase, or the neverending ads that follow us around, pretty much everywhere we go in the digital world, we are being recommended products and services. These recommendations have the power to influence how we spend our time and attention, our purchasing decisions, and what we believe. While there have been plenty of products that previously tried to offer a recommendation API, most companies still build this in-house and there has yet to be a company like Algolia that dominates recommendations. With the recent advances in AI, there is an opportunity to focus squarely on building the best recommendation tech and act as the arms dealer selling this as-a-service to medium and large companies. By working across companies, you should be able to train models on way more data than a company would be able to with just their own data. Additionally, while recommendations might be important to the success of a company, it’s not their core competency and we’ve seen the desire for companies to buy instead of build for many critical but not sufficient parts of their stack.

2. Substack With Dynamic Ads

With the unbundling of media and the rise of newsletters, companies like Substack have popped up to make it super simple for anyone to write and publish a newsletter. Today, Substack claims “hundreds of thousands of newsletters” and while Substack does offer the ability to offer a paid feed, the vast majority of newsletters are free. For those who choose to monetize directly through subscribers, the value capture is very, very concentrated with their top publishers where the top 10 alone earned a collective $20m. For most authors who want to monetize, they focus on ads or sponsored sections within their content. Once they amass a certain scale of readers, they can begin to find sponsors who want to promote their product or service to that audience. This is driven almost exclusively by humans today who do manual ad sales and the authors bake the content in before they hit publish. The upside of this model is that you don’t have to give up 10% to Substack, but the downside is that you’re responsible for finding potential sponsors, negotiating rates, trying to fill all available slots, agreeing on copy and/or imagery, and then doing it over and over for each edition.

All across the internet, television, and even in the world of audio, we are constantly being bombarded with ads. Historically these ads were pretty roughly targeted but as advertisers got more sophisticated and publishers collected more data, you can now target ads based on geo, time, IP address, device type, and tons of other information. Podcasts, who typically monetize via direct response ads that are baked into the podcast file, have recently started to do dynamic ad insertion where the episode is actually stitched together at the time a listener requests it with specific ads from brands who want to target that user. Typically, the hosting provider both aggregates the podcasters and also amasses a base of advertisers. Since they own the analytics, they’re in a position to know what ad should go for in for each particular listener. Similarly, Substack has aggregated the writers who host and publish their content through them. They own the analytics and since the article is already text, they can use NLP to understand the contents of the post and use that to help create relevant ads. I don’t think Substack is rocket science to build, so another company can create a similar publishing platform and also get a large set of advertisers to match-make with authors who opt-in. Since the platform is the one doing the sending, advertisers can “bid” on certain readers and an ad module can get inserted upon send to either the whole list or a subset of it. Creators don’t love Substack taking 10% when it feels like they aren’t adding a ton of value, but when the platform brings the advertisers and does the work of matching and inserting, it feels easier to take a cut without pissing off the authors.

[NOTE: After writing this I discovered that Beehiiv is doing something very similar. I already wrote this “Thing” so still sending it as is but want to give a big shout out to Beehiiv as I love what they’re doing and I very well might switch over to their platform!]

3. SCIN SaaS

If you’ve never heard of a SCIN or a Self-Cancelling Installment note, I think you are probably in the majority (I was in the same boat until a few weeks ago). We all know that rich people have fancy financial planners who can help them take advantage of every tax loophole, estate planning trick, and other ways to preserve and optimize wealth. As the Baby Boomer generation ages, there is going to be the largest generational wealth transfer in the history of the US. Over the next 25 years, this generation is expected to pass along up to $68T to their children and other beneficiaries. In addition to just pure monetary assets, the Boomers today collectively own around 2/3 of all businesses in the US including 2.5 million small businesses which employ over 25 million Americans.

When a living person transfers property or money to someone else, that distribution is subject to a gift tax. If property and monetary assets are transferred to a beneficiary upon death, the recipients will be subject to estate taxes. While there are exclusions that can be taken advantage of up to a certain amount with proper planning, gifts and estate transfers are taxed at 40%! A SCIN is a clever way, especially for people who own businesses, to sell their business or other assets to their children in exchange for an interest-bearing installment note resulting in no taxable gift. The self-cancelling portion refers to the fact that if the family member dies during the term of the note, the buyer (ie the children) do not face any future payment obligation. Appreciation of the assets after sale is also excluded from the estate which means you can transfer everything tax free. As with any complex legal loopholes, I’m sure there is a ton of unnecessary complexity and cost associated with setting up a SCIN… plus the lack of general awareness. Just as Trust & Will built a modern, digital, cost-effective solution to set up a will or a trust, a company could do the same for SCINs. I’d specifically target Baby Boomers who own small businesses (or better yet, their Millennial kids!) as they have the most to gain through this vehicle and it’s a large enough population.

That’s all for today! If you have thoughts, comments, or want to get in touch, find me on Twitter at @ezelby and if you enjoyed this, please subscribe and share with a friend or two!

~ Elaine

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