A lucrative opportunity: VPN companies
Call me crazy, but I'm fascinated by virtual private network (VPN) companies after seeing them sponsor Casey Niestat videos, a viral glitter bomb prank, and commercials on ESPN.
The VPN business checks all the boxes for why new entrants can win:
We spoke with a few VPN insiders to find out how the business works. Here are a few highlights.
- massive margins
- little upfront costs
- untrustworthy competition
First off, what’s a VPN?
VPNs let users search and browse anonymously, and better secure their work when using public networks.
If you don’t use a VPN, it’s like pasting all that information on a billboard in front of your house, Justin Antonipillai, CEO of WireWheel, told us.
Three of the biggest VPN players are:
- NordVPN: Based in Panama. Very little info on their team is out there (most employees on LinkedIn don't even have a picture or last name).
- ExpressVPN: Based in the Virgin Islands.
- Private Internet Access: Spitting off so much cash that they've started a private equity group and bought a UFC competitor.
According to Michael Gargiulo, founder of the popular VPN review site, VPN.com, two of these companies do ~$250m in annual revenue with the third at $80m. And they’re all bootstrapped.
How fast is this growing?
The rise of data breaches is driving demand. VPN-related searches grew from 1 million a month to 17 million in the last 5 years.
Tim Westergren, founder of Pandora, told me he saw this same trend among the average Pandora user.
“Consumers are beginning to get more upset about feeling their data’s being exploited,” Westergren said. “We're gonna start seeing alternatives pop up that give consumers ownership.”
The opportunity we see:
VPNs for small and medium businesses.
“We get about 20% of our traffic inquiring about a [small to midsize business] solution,” Garguilo told us. “There's really no widespread adopted VPN product in the SMB world.”
The barrier to entry:
Acquiring customers: For most newcomers, advertising on Google and Facebook is prohibitively expensive. Cost-per-clicks average ~$8. With a 2% conversion rate, the cost to acquire a customer is $400...quite high for a $3.99/month product. And ranking organically will take years and millions of dollars, so founders need to find a more cost-effective way to get customers.
Building a quality product: “It's not too difficult to build a VPN,” Gargiulo said. But making it work well, specifically making it fast, is a huge challenge. “How fast does it go at night or at peak times -- that’s complex.”
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