Ryan Reynolds didn’t pay close enough attention to The Matrix.

Bending Spoons investment is going to blow up in his face

News came out a few weeks ago that Bending Spoons, a consumer app studio, raised a massive $340 million round of financing. The press gushed about it: “Hollywood star, tech execs invest in Italian start-up Bending Spoons”, “Ryan Reynolds invests in 'terrifying' Italian start-up Bending”. And Ryan himself said things that are just so easy to imagine him saying (a testament to the spectacular job he’s done branding himself): “Their apps enable anyone to become a creative genius with minimum effort. In fact, their products terrify me so much, I had to invest.” (Ironically - or not? - his ad agency is called Maximum Effort…)

The problem? Bending Spoons is the one the most predatory actors on the entire App Store - they’re terrifying in a completely different way. 

How does a company that no one’s ever heard of, whose products no one can remember downloading, “raise” $340 million? That’s more than meditation app juggernaut Calm ($218M raised), photo & video editing app powerhouse Lightricks ($335M), music learning behemoth Simply ($92M) and many, many others. Not that I’m a stickler for status, but isn’t it interesting that those three app developers count highly sophisticated investors like Insight, Lightspeed, TPG, Aleph and Goldman Sachs, while Bending Spoons counts…Ryan Reynolds and a Japanese soccer star? 

This isn’t meant to be a knock on Ryan - he’s done what most actors dream of, which is leverage his celebrity to anchor and grow an incredible set of companies and demonstrate his insane business sense. Mint Mobile has been an absolute blockbuster, and the creative work he’s done at his agency Maximum Effort is astounding. 

But Ryan’s totally out of his comfort zone here, and it shows. 

First, let’s talk about that $340M fundraise. You might be thinking: sheesh, that’s an awful lot of money for Ryan and various other (random) investors to pony up for a no-name Italian startup. And it would be! Except that there’s no way it’s $340M of equity. Because think about it: VC funds (generally) take minority stakes in the companies they invest in (as opposed to private equity funds), so if you’re raising a $340M investment for a minority stake, your valuation is almost certainly above $800M. It’s theoretically possible that Bending Spoons has an incredible business that’s worth $800M+, but fortunately for us Italian companies have to file their corporate reports each year, and you can download the Bending Spoons S.P.A. one for a nifty €2.50. 

What does it show? That Bending Spoons has built a nice business with €108M of revenue and €16M of operating income. Let’s be generous and assume that depreciation & amortization (D&A) is €16M, resulting in EBITDA of €32M (a healthy ~30% EBITDA margin). In order to hit an $800M valuation (assuming USD/EUR parity), you’d have to justify giving Bending Spoons a 25x EBITDA and 7x revenue multiple. That’s….highly unlikely. (For context, Match Group - which owns Tinder, has massive network effects and runs a 20x bigger business - trades at just 5x revenue and 16x EBITDA). 

You’ll also notice that the funding announcement references two obscure (to Americans) Italian banks: Intesa Sanpaolo and Banco BPM. Why? Because the vast, vast majority of this funding (notice how the press release carefully says “financing” and not “funding”) is almost certainly in the form of debt. So what most likely happened is that Bending Spoons raised ~$50M in equity from all these various celebrities, and a much larger debt facility (~$300M) that they can draw on to pursue the “acquisitions” they refer to. It’s highly misleading for the company to foster the narrative that this was a $340M equity funding round, but then again, there are tons of other examples of this happening because tech ‘reporters’ love big numbers, so I don’t necessarily fault them. 

Now, lest you think this critique an ad hominem one, let’s talk about Bending Spoons’ business model. The basic concept is very simple: 

1. Find a solid app that someone else built and buy it from them (see Splice (acquired from GoPro) and 30 Day Fitness)

2. Optimize the monetization of said app (by implementing from scratch or fine-tuning existing subscriptions), thereby driving higher lifetime value (LTV)

3. Take that higher LTV and use it to bid on expensive ad inventory (on Google, Facebook, Apple Search) where you can acquire more users (aka drive more downloads) - i.e. leverage performance marketing for growth

4. Convert those new downloads to paying users

5. Massively ramp revenues and cash flow by combining the new users + the better monetization

6. Use the new cash flow - plus the debt from those lovely Italian banks - to fund the next acquisition 

7. Lather, rinse, repeat

There is absolutely nothing wrong with this business model. In fact, it’s the model game companies have used for decades (with ads and IAP rather than subscriptions) - Zynga and AppLovin built $10B businesses doing it. What differentiates Bending Spoons, though, is how they do it. 

Let’s set the context: how much do you pay for your existing monthly subscriptions? You’ve got the streaming companies that invest tens of billions of dollars in content a year - Netflix is $10/month, HBO is $15, Hulu is $7, etc. Then you’ve got your music subscriptions where you can access any artist’s full catalog any time you want - Spotify is $10/month, Apple Music is the same. And don’t forget about your subscriptions that provide IRL value: Amazon delivers goods to your door in 2 days for $15/month and Planet Fitness gives you access to a full gym for $10/month. 

Remini - Bending Spoons’ new app that the press is gushing over - is $10 a WEEK. And Splice, the app that started it all? That’ll set you back a cool $5/week.

Yes, you read that right: Remini, a nifty little photo editing app (of which there are hundreds in the App Store), charges you $10 every single week in order to use their product. Go see for yourselves: here’s a link to download Splice and here’s one for Remini. You’ll be hit with a subscription paywall in the first ~10 seconds. 

Does anyone really think it’s appropriate to pay $10 a week for a photo editing app? 

One way to answer that question would be to look at the competitors - let’s take the biggest ones: Lightrick’s Facetune is $5/month, FaceApp is $7.50/month and PicsArt is $12/month. Okay so none of them think that weekly pricing is appropriate. 

How about other utility & productivity apps? Photo editing is a big category, but what about PDF scanners, translators, grammar correction, VPNs and password managers? Not a single one of the top products in those categories charges weekly subscriptions (e.g. CamScanner, Grammarly, HotspotShield, iTranslate, Keeper), except for other scammy actors that people in the space know all too well, like TranslateNow ($5/week). 

So why does Bending Spoons push weekly subscriptions? Well, it comes down to a simple math equation. See, the great thing about the App Store is that a consumer never has to put their credit card information in when making a purchase - just quickly scan your face and the payment is made. When you combine this seamless form of payment with auto-renewing subscriptions, you’ve created a beautiful (and sometimes terrifying) dynamic: users quickly and seamlessly enter into an auto-renewing subscription. And the great thing about auto-renewal is that it doesn’t stop charging you until you proactively cancel the subscription. So what Bending Spoons is betting on is that you forget to cancel your subscription long enough that they can extract as many $10 payments from you as possible. The more payments they extract, the more revenue they have and therefore the more money they can spend on Apple Search Ads to acquire more users. So their incentive is to get as many people paying the subscription as possible. 

I want to be clear that that last sentence is not an indictment of all subscription models - acquiring users and convincing them of the value of your product such that they subscribe to it is a completely above board business model. What’s not above board is tricking people into subscribing in the first place. Let’s look at how Bending Spoons does this by breaking down their subscription offer screen:

First, they use human psychology. If you saw a $39.99/month subscription price for a photo editing app, you’d delete it within seconds because that $39.99 price is a big headline number. But make the headline $9.99 and magically it becomes more palatable - most people don’t even see that the period is weekly.  All of sudden it doesn’t look as scary because you’re just seeing the ‘$9.99’, not the ‘$39.99’. 

Second, they don’t disclose anywhere that the subscription auto-renews - all it says is “$9.99/week”. This is critical because the user has no idea that they are going to be charged $9.99 every week until they go into Apple’s settings menu and cancel it themselves (something most users have no idea how to do). 

Third, the call-to-action (CTA) on the button is “Continue”. What are you ‘Continuing’ to - the next screen? A product demo? The product itself? No, you’re ‘Continuing’ to paying a subscription. But you never had a subscription before, so how can you say you’re ‘Continuing’ into it?! 

And lastly, that ‘Continue’ button is another one of those psychological / dark pattern tricks: when you first downloaded the app you were shown four screens (see below), each of which had a button at the bottom leading you to the next screen. Each of those buttons is shaped as an oval, has a black and white color scheme, and sits at the button of the screen. So by the time you get to the fifth screen - the subscription offer - you’re accustomed to just tapping that bottom button. So you tap again, but this time instead of being shown another feature of the app, you’re entering into the subscription.

(On top of all of this they’re violating Apple’s App Store rules: “If you are offering an auto-renewable subscription, you’ll need to explain how auto-renewal works in the purchase flow within your app. Apple’s @BillH - are you paying attention?)

The crazy thing about all of this is that…it works. If they get the average subscriber to retain for 7 weeks, that’s $70 of revenue to them. Facetune’s $10/month subscription would require retention of 7 months, something that’s possible but on the higher end of retention for utility and productivity app subscribers in the App Store. So you might say: well why go with the weekly subscription if you can achieve the same thing with monthly subscription and without pissing off your users? 

The answer comes back to performance marketing (and math). If I can extract $70 in value in a shorter time frame (<2 months) than my competitors (7 months), then I can fund more user acquisition (i.e. ads on Facebook/Google/Apple Search Ads). And the more users I acquire through paid marketing, the higher my app ranks on organic search terms (like “photo editor”), which means I get more organic (free) downloads that I can drive revenue from, allowing me to spend more on paid marketing… ad infinitum.

At least it would be ad infinitum if that market grew every year. But it doesn’t, so at some point you reach saturation with a particular app. This is what happened with Bending Spoon’s Splice app; when that hit its ceiling, Bending Spoons started investing in Remini. And it’s happened before too: Bending Spoons bought a fitness app called 30 Day Fitness several years ago - they pumped it until it hit a ceiling, and it’s been on the decline ever since. 

So then how are people being convinced to invest in them, then? It’s actually pretty simple: Bending Spoons spins a story about how they build great creative apps, and how access to capital will speed up their business plan by allowing them to go out and acquire bigger apps from other developers. When you buy a big app that is under-monetized or under-marketed, you turn those dials up to 11 immediately and get a huge boost in business performance. You add that revenue and EBITDA to your bottom line and then go do it all over again. 

I mean, let’s be clear: Bending Spoons has exploited this model nicely. Their financial results are publicly reported in the Italian business registry: revenue grew from €97M in 2020 to €108M  in 2021 and Operating Income went from €16M to €19M in the same period. So from 10,000 feet that business looks interesting and compelling (though those aren’t growth rates that you’re necessarily crowing about).  

But there’s a reason all the experienced app investors passed on this one: it’s a house of cards. I don’t care if it’s $100M or $1B of revenue - if it’s coming from weekly subscriptions in the App Store it’s going to come crashing down, especially when you’re tricking your users. Perhaps the best analogy is that Bending Spoons is like the bending spoon from The Matrix: a convincing illusion.