Unless you are an investor, you may not have heard of Tegus. You may never even have heard of the expert network market that Tegus is disrupting. But if you are building a marketplace, Tegus is worth knowing about. The company’s story demonstrates how to start a marketplace and how to enter a commoditized market using a different business model to compete.
The Expert Network Market
I’ll let Gerson Lehman Group (GLG), the self-proclaimed pioneer of the expert network market, describe the market which they call Insight Networks. This excerpt is from their S-1 which they filed late in 2021, though they never went public. (Talk about all the pain and none of the gain!)
GLG was founded in 1998 and pioneered the Insight Network category. Insight Networks are businesses that connect companies with expert resources or subject-matter experts, such as academics, C-level and other experienced executives to provide valuable information, data or assistance through a range of offerings such as calls with an expert and surveys…We are experts on expertise with a network of over 2,700 Clients and approximately 1,000,000 profiled Network Members…According to our analysis, GLG’s 2020 Revenues were more than 2.3 times larger than our nearest competitor, AlphaSights, based on their reported 2020 revenue.
Expert networks connect hedge funds, consulting firms, PE funds, corporates, and others to industry and subject matter experts who can help them make investment and competitive decisions. (If you follow the market closely, you will recall that the experts on these networks have, at times, been accused of disclosing material, non-public information to investors. GLG and other networks have strengthened their compliance as a result.)
Here’s an overview of the expert network market:
The top expert networks are:
#1: In 2021, GLG was on track to do about $650 million in revenue, up 14% over the prior year. GLG had an adjusted EBITDA of 21.6%.
#2?: AlphaSights, which GLG cites as its largest competitor, had revenue of £196.3 million for the year ended 2020 and grew almost 33% over the prior year. (During the same period, GLG grew just 3%.) AlphaSights had Adjusted EBITDA of about 37% in 2020, making it a “Rule of 70” company.
#3?: Guidepoint, does not disclose its revenue, but based on its number of employees, probably has revenue of $250-$300 million. It could be #2.
#4: Third Bridge, had revenue of $168 million for the year ended 2020, growing 11% over the prior year. The company had a gross margin of 77%, and adjusted EBITDA (by my estimate) of about 20%.
According to InexOne, the expert network market is about $1.9 billion and growing at 18% annually. Given these four companies have about $1.5 billion in revenue, the rest of the 100 players are either quite small and/or InexOne has underestimated the market size.
(Interestingly, InexOne provides a software platform that a buyer of multiple expert network services can use to better manage their engagements across the networks. In platform lingo, InexOne makes it easier for investors to multi-home.)
The Traditional Expert Network Business Model
The traditional business model of expert networks was transactional. An investor (buyer) would ask the expert network (e.g., GLG) for subject matter experts in a specific industry or company. GLG would find these experts in their database or, if necessary, through referral, and charge the buyer an hourly rate for the interviews. (Surveys and syndicated research are also a part of the offering.) Buyers could choose whether or not to disclose their identity to the expert. The interviews were proprietary to the buyer who paid for them.
The buyer often pays a rate of often more than $1000/hour. The expert network then pays the experts (who are independent consultants) an hourly rate. GLG suggests these hourly rates to experts based on what they say other “similar” experts are charging. GLG does not tell the expert what they are charging the buyer, nor do they disclose to the buyer the expert’s hourly rate. (There is also no self-service way for experts to change their hourly rate.)
According to GLG’s S-1, GLG’s gross margin after expert fees, but before most other costs (except payments costs), is about 73%. There’s your answer, GLG marks up expert fees 3-4x. In marketplace terms, that is GLG’s take rate–and it is substantial relative to most labor marketplaces. As we will see, this opaque and substantial margin forms the profit pool for Tegus to target.
Transactions Made Subscriptions
To my surprise, GLG reports that more than 90% of its revenue is recurring, subscription revenue. It seems GLG sells its clients time-based or consumption-based subscriptions. (Presumably, consumption-based subscriptions dominate, as time-based seem risky.) These subscriptions appear to be pre-buys of a certain number of credits with each interview representing a number of credits. GLG only reports geographic segments, not by product or contract type, so it is a little hard to tell exactly how their pricing works.
The Tegus Business Model
How do you disrupt an established market that is relatively commoditized? After all, experts and investors can easily “multi-home” on multiple networks. For experts, profiles are relatively easy to set up and incentives for exclusivity are relatively light. For investors, it’s easy to sign up for multiple networks and InexOne will sell you a platform to make it even easier! The Tegus answer is to employ a different business model, reminiscent of a cross between Costco and a library.
In the Tegus business model, the investor (buyer) pays a membership fee to have access to all of the expert interviews on the platform, which are shared/contributory, not proprietary. Buyers can also ask follow-up questions on existing interviews. When a buyer wants a new interview they pay the cost of the interview plus a flat per interview fee. Each interview is anonymized, compliance-checked, recorded and transcribed, and presumably, after some delay, put on the platform to be shared with others. It appears that investors can also pay a premium to further delay the public posting of the interview.
I think there is some real genius in this model:
- It’s a more “true” subscription model
- Pricing is transparent
- Compliance is a whole lot more transparent
- And the time delay, plus an additional premium for more time delay, is pure pricing genius.
(Note: some expert networks have had surveys, reports, and even transcripted interviews they commissioned themselves in a library, what’s really new here is the contributory/shared model.)
The market appears to like the Tegus approach. According to LinkedIn, Tegus has 426 employees. At $200k in revenue per employee (a significant discount to GLG and AlphaSights which have $280k and $290k in revenue per employee respectively), Tegus is coming up on $100 million in annual revenue. A cursory glance at the market suggests Tegus is now in the fifth position. Tegus has achieved this, despite the other networks having a 10-15 year head start in a market that might have appeared to have “winner-take-most” dynamics. Some of the company’s competitors are adopting aspects of their business model by offering comparable, shared libraries.
Tegus Origin Story
Twin brothers started Tegus. One was at an investor and one was at AlphaSights. The brothers realized that with all of the multi-homing going on on both sides of the marketplace, a shared model might work better. (Two-sided network, two-sided family!)
What’s even more interesting, is how the brothers chose to start Tegus. When you start a two-sided marketplace, you often have to pick a niche where you can solve the chicken and the egg dilemma of gaining liquidity. In this case, Tegus had to figure out which investors and experts to target. You simply can’t cover every company and every area of expertise to start!
The Tegus founders chose to focus exclusively on public enterprise software companies in the US. It was a great choice for many reasons.
- A very limited universe of companies to cover, yet
- Huge market caps are at stake with lots of interested hedge fund investors
- There are many experts across disciplines and companies
- IPOs and acquisitions galore
- Public equity markets are a great fit with the business model of clean compliance and time-based pricing
Tegus is getting a lot of things right–and yet it has a long way to go. The company is still getting established with experts, is still expanding its coverage, and Tegus is still US-centric. Tegus remains in a battle with well-funded, established networks that are copying them. It is David against a few relative Goliaths.
I’m rooting for this hometown (Chicago) challenger–assuming they are White Sox fans.