Rekindling VCs' passion for online dating

Since a somewhat brief fling with the industry from 2008 to 2011, Europe's online dating market has not enjoyed a particularly satisfying relationship with venture capital, despite attractive underlying trends. The sector's global market value is reported to be hovering around $4bn – the US market on its own hit $2.1bn in 2012, while the UK market reached £170m.

The sector appears to be impervious to the financial difficulties faced by other digital markets, as its value has continued to rise unabated since the first major online dating site, Match.com, was registered in 1995. And in an increasingly internet-driven society, the industry is forecast to experience even greater growth as more of the world looks online to fulfill every desire.

"Consumer attitude towards using online dating as a way of meeting a potential partner has become more acceptable, and as this improves so will market penetration," says Encore Capital partner Shirin Gandhi. An eight-year-long study by Pew Research Center found that one in 10 adult US citizens has used online dating services. In the UK, the figure stands at an estimated 9.1 million people.

A seemingly endless list of sites catering to almost every kind of dating preference is now available, from sites dedicated to naturists to those catering exclusively to the Amish. "The market will continue to grow and new ideas and concepts will emerge," says Gandhi, "like targeted dating sites and even those promoting casual encounters – like cheating – have in the past."

Mobile movement
Venture firms initially poured capital into basic dating websites before moving towards more social media-based offerings, such as 360 Capital Partners' €2m investment in Paris-based Smartdate, a Facebook-integrated dating platform, in 2010.

Now the sector has expanded organically into dating applications for smartphones, which often utilise the integration of social media to take advantage of an increasingly connected mobile ecosystem. "Since 2011, the industry has been disrupted by freemium dating and by platform change – from PC and the web to mobile," says Pavel Bogdanov, a partner at Almaz Capital, a backer of Estonia-based social dating site Flirtic. "What will be the winning model in the future? We believe it is now getting clear that the winner will be freemium and mobile."

Encore's Gandhi agrees: "Mobile dating is not just a trend, but a natural progression of the entire concept of dating itself. The time users spend on mobile continues to increase and mobile dating apps have improved considerably to reflect the increasingly social nature of dating. Through mobile apps, both the amount of time spent and the frequency of use of dating sites has grown materially – a reflection of the 'always on' nature of mobile apps."

The browser-based online dating market has long been dominated by heavyweights such as Match.com and OkCupid, but the overwhelming popularity of app start-ups such as US-based Tinder indicates that the mobile space has yet to establish the same pecking order.

However, the young mobile dating sector must first find its feet to become a viable investment opportunity. "It is a vast industry with the potential to grow more rapidly driven by mobile apps," says Gandhi. "However, a universal model on how to make mobile dating work on a large scale has not yet been found.

"Scale is king," he adds. "The big players such as e-Harmony and Match.com will be difficult to compete against."

Bogdanov says that once there is the possibility of big exits for mobile dating companies, Europe could witness a revival of venture capital investments in the space. "Once new leaders in freemium mobile dating are there, they could – if they monetise well – grow to become large enough to be taken public."

Toe-dipping
Europe's venture firms may already be testing the waters. At the beginning of the month, Paua Ventures, Astutia Ventures and IBB Beteiligungsgesellschaft invested in German social discovery and dating app mbrace.

But while US players have welcomed start-ups operating in the mobile dating space already, Europe has yet to see a noticeable spike of interest from investors in the nascent market.

However, a more active US market is not all that surprising. "Language barriers in Europe naturally limit dating companies to the linguistic markets where they operate," explains Almaz's Bogdanov. "Dating also depends on cultural specifics. Expanding to a neighbouring market is often very expensive – usually the market has a competitor that has already signed up most potential subscribers."

But Europe's industry could soon be more attractive, as new and untapped large markets on the continent begin to flourish. "Online dating is a growing market that still hasn't reached its full potential, at least in Eastern Europe and the former Soviet Union," says Bogdanov. Russia, most notably, is discovering a hearty appetite for all things internet-based, with the number of Russian internet users reaching unparalleled heights and sales of smartphones in the country increasing by 35% in 2013. It's only a matter of time before more of its inhabitants begin looking online for love.

"We believe the industry will keep growing," says Bogdanov. He reasons that not only will emerging markets cause an increase in consumers in the space, but the rate at which technology is advancing is exponential: "Five or more years down the road, dating could be changed again by the popularity of wearable electronics."

The sector's harmonious pairing with mobile devices outlines its ability to take full advantage of technological changes, which will no doubt help rekindle the flame for venture capitalists. But above all else, the industry's trump card as an attractive investment space is without a doubt its staying power: it seems online dating services will always be wanted and needed.

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