Patreon Found a Way to Pay the Creative Class. Will It Work?

(Bloomberg) -- Four years ago, a musician named Jack Conte co-founded Patreon with a pledge to help the creative class earn a living making everything from podcasts to paintings. Pronounced Pay-Tree-On, the startup is a digital spin on the arts patronage that has flourished since the Medicis backed Michelangelo back in the 1500s.

Patreon Inc. has signed up 50,000-plus creators, who pay the company 5 percent of their earnings; last year alone, it attracted more than $150 million from one million patrons. Conte’s investors are betting a critical mass of talent will become sufficiently popular to push Patreon into the black.

There’s just one hitch: While some creators—including three guys behind an irreverent socialist podcast—pull in tens of thousands of dollars a month, most make less than $100 and have only a handful of supporters. Given that reality, can Patreon make the economics work?

“I don't think they need to get Taylor Swift on the platform to be successful, in the same way I don't think YouTube really needs HBO on its platform to be successful,” says Chris Paik, the venture capitalist who led Thrive Capital's investment in Patreon. “It's still early days.”

Before starting Patreon, Conte himself struggled to earn a living as an independent artist. For several years, he made popular music videos on YouTube. One creation, “Pedals,” featured dancing handmade robots, cost $10,000 to make and was viewed more than 2 million times. It generated mere hundreds of dollars in ad revenue. “That’s when I started thinking something is wrong here,” Conte says. “This sucks.”  

His goal was to create a less predatory business model for people like him. In a pitch for Patreon that appears at the end of the robots video, Conte says: “It’s like a Kickstarter for people who release stuff on a regular basis. It’s for the thousands of content creators, tens of thousands who have this beautiful prolific output, it’s for them, it’s for us.” 

Before long, the startup was signing up thousands of creators a month. Niche knitting magazines, narrated videos of complex machines being taken apart piece by piece and a podcast where Christians talk about science and philosophy are just a sampling of the projects now supported through Patreon—mostly by patrons spending a few bucks a month.

Conte’s pitch also resonated with a less arty crowd: Silicon Valley’s unsentimental venture capitalists, who saw the next Etsy or Shopify. A series of multi-million-dollar funding rounds culminated in a $60 million investment led by early Instagram backer Thrive Capital in September 2017, which valued the company at roughly $400 million, according to a person familiar with the situation. (Patreon declined to comment on the valuation.)

Investors are betting Patreon will eventually become the go-to way for people to reward creators on other platforms, perhaps with a pay button alongside content on YouTube and Instagram. “Patreon has a very good chance of being fundamental to the fabric and structure of the internet,'' says Danny Rimer, a venture capitalist with Index Ventures and a former Etsy board member. “We’re in the very, very early days of this service, but there’s a lot that can be done.”

Conte must pull off a tricky balancing act: build a profitable enterprise without alienating creatives looking for any sign that Patreon has sold out to its VC backers. Last month, after nearly a year of experimentation, Patreon changed its fee structure to shift the cost of credit card fees to subscribers rather than creators. The company said the changes would let creators keep more of their donations.

But it backfired spectacularly when hundreds of creators lost many of their patrons. Patreon quickly backtracked. “We still have to fix the problems that those changes addressed, but we’re going to fix them in a different way,” Conte said on the company's blog.

Patreon has also been criticized for setting unrealistic expectations of success. Brent Knepper, a writer and photographer who spent months trying to make money on Patreon, documented his experience last month for The Outline. Citing data from Patreon tracker Graphtreon, Knepper said only 2 percent of creators make more than the equivalent of the $7.25 an hour federal minimum wage.

The bald fact is that many Patreon users aren't creating content that stands out. Some use the service simply as a way to solicit help covering their day-to-day expenses and aren't creating much at all.

Conte acknowledges Patreon alone can't make someone into an artist. He says new software tools are in the works that will help creators build their personal brands and keep in touch with patrons. If those catch on, Patreon could potentially start charging creators a subscription fee. Conte and his VC backers often cite another business when describing Patreon's potential future: Canada's Shopify, which provides a host of website building and online marketing tools to merchants for a monthly fee.

When he started Patreon, Conte cited Kickstarter as an inspiration. That might not be the best comparison for investors looking for a return. Kickstarter has shunned a public offering, choosing instead to become a public benefit corporation and focus on social good over profit. It recently started paying a dividend to investors to return some of the capital they'd miss out on if the company never went public or was sold.

Conte says he has plenty of time and capital to perfect his business model and insists that “down the road, I would love for Patreon to be a public company.”

To contact the author of this story: Gerrit De Vynck in New York at gdevynck@bloomberg.net.

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net, Jillian Ward

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