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Defector Annual Report, September 2020 – August 2021

Published on October 4, 2021

Purpose of this report

Annual reports are usually created to provide insight into a company’s business operations and strategy so that current and potential shareholders can evaluate existing or potential future investment. Defector has no outside investors and no intention of raising outside capital. We expect the audience for this annual report, then, to be 1) our subscribers who directly fund our operations, and to whom we feel a responsibility to build a sustainable business and produce the best website possible, and 2) any interested parties within the media industry, especially those who may wish to build a worker-owned business of their own.

(Note that we are using the phrase “annual report” because it’s a known business concept. We are not sure we will write this report every year, mostly because we might not have new or interesting things to say every 12 months.)

Financial summary*

9/20 – 8/21
Total subscription revenue$3,000,000
All other revenue (site sponsorships, podcast/Twitch rev share, merch)$200,000
Total revenue~$3,200,000
Employee compensation$1,700,000
Employee benefits$150,000
Lede by Alley fees$250,000
Other tech and processing fees (Pico, Stripe, Mailchimp, etc.)$300,000
Professional fees (legal, HR, accounting) and insurance costs$200,000
Merch production & fulfillment fees (including promotional giveaways without direct revenue)$50,000
Freelance spend and reporting expenses$100,000
Paid advertising$30,000
Taxes, state and federal filings, and related processing fees$200,000
Other G&A expenses$50,000
Total operating expenses~$3,000,000
*These numbers are stylized approximations, published for the informational and educational purposes of this public annual report, and do not align precisely to Defector’s official P&L statements or tax filings.

Revenue details

Of the $3.2mm revenue Defector recognized this year, 95% was generated by subscriptions to the website. We truly could not exist without our subscribers, as we overwhelmingly rely on their direct subscription dollars to fund all of our editorial and business operations. 

The gross number of people who have ever held a paid subscription to Defector.com is 41k. Net of churned subscribers (i.e., people who once held a paid subscription, but no longer do), we have 36k active subscribers as of September 30, 2021. Approximately 65% of subscribers are Readers, our base tier, and nearly all of the other 35% are Pals, the next tier up. About 100 people initially subscribed at the $1,000/year Accomplice level, nearly all of whom signed up right after Defector was announced in summer 2020. More than 80% of our subscribers are on annual plans rather than monthly ones. So far, the rate of retention of annual subscribers—i.e., the percentage of people who’ve now renewed for a second year—is approximately 85-86%; that number is slightly higher among Pals and slightly lower among Readers. 60% of Accomplices have renewed at that same tier for a second year. For subscribers on monthly subscriptions, our average churn rate is approximately 3-4% each month, though that number varies meaningfully depending on cohort and month.

Over the past year we embarked on an array of initiatives and tools to grow our subscriber base, with varying levels of success:

  • Our soft paywall is our primary source for generating leads; any new visitor to the site can read a few blogs each month before they’re asked to give us their email address, which allows them to read a few more blogs each month. Those email addresses then receive our weekly Blogs of the Week newsletter and occasional paid subscription appeal emails. Nearly 10,000 people became paid subscribers on a date subsequent to when they initially gave us their email address.
  • We pushed a holiday gifting campaign, where participants were each sent a free Defector tote bag. Various staffers did their own giveaways and/or stunts to drive gift purchases. From Thanksgiving through the first few days of January, we sold roughly 600 gift subscriptions.
  • We experimented with paid advertising on Twitter and Google:
    • The Twitter paid ad experience for small businesses was very unpleasant: The platform was difficult to use, emails to a “24 hour” small business help inbox went unanswered, automated filters would block sponsored tweets with words like “bullshit” and “Rush Limbaugh” in them but not alert us in any way, and it took several weeks for us to get our ad spending limit raised from the paltry daily spend maximum imposed on new ad buyers. We estimated LTV:CAC (lifetime value to customer acquisition cost) ratios were in the range of 2.0-2.5x and decided this return was not sufficiently large to justify continued investment, particularly during our first year of operation when we needed to be conservative with cash outlays, and when our LTV calculation was still based on guesses as to what annual subscriber churn would actually look like. (We should note that, on this topic and nearly every other one in this report, it’s possible we are just big dumb idiots who didn’t know what we were doing. But the Big Dumb Idiots Who Don’t Know What They’re Doing demographic is enormous and growing all the time, and you’d think Twitter would want to capture more of our collective marketing spend.)
    • Our Google paid advertising efforts have been more promising—in part because a small business-focused support team has taught us best practices for working within the Google Ads environment—though it’s too early in our experiments to share any quantitative results. 
    • Many digital media companies and content marketing consultants swear that Facebook ads are the most effective, scalable advertising channel for converting readers to paid subscribers. This may be true, but much of our staff are adamantly opposed to using Facebook, given their long, proven track record of malevolence towards publishers and the media industry. We do not anticipate ever spending any money with Facebook, and in fact have abandoned publishing even simple posts to our company Facebook page.
  • All staffers were encouraged to share their blogs through any channels available to them, as well as to pursue whatever earned media opportunities they believed were appropriate for getting the word out about Defector. In that sense, every employee at Defector is responsible for “audience development” by circulating their own blogs, appearing on podcasts, radio shows, panels at conferences, etc., whether to speak to a specific blog they wrote or the overall experience of being a small business owner of Defector Media.

In the end, good blogs were our best marketing tool. Well-written blogs are read and shared, allowing people to discover us, read a few blogs, hit the paywall, register for the mailing list, and eventually, hopefully, give us money. Broadly speaking, there is a correlation between blog traffic and paid conversion; in other words, the same blogs drove traffic AND paid subscriptions. Each of the ten blogs that drove the most new subscriptions this past year also showed up among the top 100 blogs by total pageviews.

Our other revenue streams include revenue sharing on the ad sales of The Distraction podcast through our podcast partnership with Stitcher, sponsorship sales for the site and newsletter, merch sales, and monetization of our Twitch channel.

We launched the site in September 2020 with Warby Parker as the launch sponsor, though Defector.com then went dormant on the sponsorship front for many months. In part this represented a deliberate choice to focus operational attention on other areas of the business, and in part this represented an inability to find common ground with interested sponsors. We spoke with several Fortune 500 companies, but each conversation felt misaligned on the volume of impressions we’d realistically be able to deliver, as well as on sponsored content and on-site integrations that we were not willing to offer. In Spring 2021, we decided to focus our efforts on smaller brands, largely direct-to-consumer ones, who were excited about our sponsorship package and the opportunity to reach our particular readers. These deals are typically structured with a relatively small fixed fee not tied to specific pageview or impression goals, plus cost-per-acquisition payments to Defector if our readers actually purchase the products. We believe this keeps our incentives aligned with both our brand sponsors and our readers: We only partner with sponsors who we believe will provide compelling products and offers that our readers would actually want to take advantage of. Like any media company publishing today that covers sports, we’ve been approached by a number of online sportsbooks of varying sizes and repute. We have decided not to work with any of them.

Our merch shop is a Shopify storefront run through Fii Marketing, a unionized merch maker based out of Rhode Island. Most of our designs are created by Defector staffers, though we have commissioned work from independent artists and hope to continue to do so selectively in the future. While Fii’s cost to produce each t-shirt is meaningfully higher than what other merch makers charge, we’re happy to work with a partner that shares our values on labor even if it means our margins on each sale are relatively low. It was not until May that someone on staff asked the brilliant and obvious question as to why we weren’t advertising our own merch in the on-site sponsorship units when there were no sponsor campaigns otherwise running; sales immediately doubled the following month.

Employee compensation & benefits details

Cash compensation at Defector has three elements:

  1. Every employee receives the same “base salary,” with twice monthly paychecks.
  2. Different positions have different “target salaries” above the base salary, within a narrow range. There are quarterly payouts towards target salaries, and those payouts are dependent on the financial performance of the company during the previous quarter.
  3. In the event that all target salaries are paid out and necessary reinvestments in the business are also accounted for, any additional distributable funds are evenly distributed as bonuses. (Over the past year, we did not distribute these bonuses.)

Compensation is entirely transparent within the company. Every one of the 23 employees knows what every other employee’s target salary is and what additional cash they’ve received at the end of each quarter.

This compensation framework assures everyone of participation in the financial upside of the company while allowing for prudent, conservative cash management. Target salaries and bonuses are calculated based on the previous quarter’s actual financial results rather than any forecasted results, so we should never be committing to distribute cash that the company would need to retain for other reasons.

We receive health insurance & other benefits and process payroll through Trinet, a Professional Employer Organization. Back in July 2020, before we really had any idea what this company would be and whether we’d be able to pay ourselves, Trinet was one of the few PEOs that was willing to bid on our business and allow us to buy group health insurance at competitive rates, for which we were very appreciative. Unfortunately, several of our health plans increased in cost by double-digit percentage points for 2021-22, including one plan increasing in cost by 40%, which sucks absolute shit. We intend to put our business out to bid again before the 2022 renewal.

Tech details

Defector.com’s tech stack is fully outsourced. During a six-week sprint in the summer of 2020, Alley Interactive built us a custom website on WordPress that served as a template for their Lede by Alley platform. Defector.com migrated to the proper Lede publishing platform in May 2021. The Lede by Alley platform uses Pico for subscription management and Coral for commenting. Pico collects subscriber payments through Stripe. The bulk of fees we pay to Alley, Pico, and Stripe are variable and calculated as a percentage of either recognized revenue or processed payment volume; those arrangements in combination with our month-to-month contracts with other third-party vendors like Mailchimp and G Suite for Business means our long-term fixed tech costs are essentially zero.

We have no product, engineering, or design talent on staff at Defector and rely on the technology partners mentioned above to keep their platforms running smoothly and improving steadily. At times that has caused immense frustrations for our readers and our staff, when an unexpected crash happens or a known glitch persists. But we are generally happy with this arrangement: It allowed us to start the company with minimal upfront tech costs, and we are able to run the business with a very small dedicated operations team. Our relationship with what is now known as The Alley Group remains particularly strong and collaborative. While our contract is structured as a platform agreement rather than work-for-hire, they regularly solicit our input for their Lede product roadmap (though they reserve the right to ignore us or tell us our requests are unrealistic and/or stupid), and we benefit from the ideas and roadmap suggestions from other Lede-based publishers, like The Colorado Sun and Discourse Blog.

Additional operating expense details

Defector has relied on several professional services partners. Alan Lungen serves as outside general counsel. In Defector’s early days, we partnered closely with Alan to formalize our organizational structure and operating model through a comprehensive operating agreement. He continues to review all of our major contracts, write our legal documentation and templates, introduce us to other lawyers and professionals with appropriate expertise when necessary (e.g., trademark, tax matters), and provide ongoing business and legal advice.

The other partner we rely on for ongoing legal expertise is Rachel Strom of Davis Wright Tremaine for matters related to free speech rights. Our editors often consult with her before publishing blogs that may invite legal scrutiny, and though we have not been involved in active litigation the past year, Rachel has been called upon to represent our interests in conversations with potential counterparties.

Your Other Half serves as our outside HR partner. Alice Chin and her team are responsible for our compliance with all relevant employment laws and for our interactions with Trinet. Your Other Half has guided multiple Defector committees as we’ve written a comprehensive employee handbook, documented decision rights and organizational processes, created DE&I and hiring policies, and implemented specific visions for a high feedback culture and a restorative justice-based “disciplinary” system, while ensuring our choices are aligned with evidence-based research and people operations best practices. They will also serve as independent investigators when/if any complaint of discrimination, harassment, or retaliation is reported.

For our bookkeeping and accounting needs, we work with Black Ink Services and Romano & Associates, respectively. They ensure Defector has streamlined bookkeeping and invoicing processes, operates tax efficiently, and can readily access “outsourced CFO” expertise when necessary. They also provide necessary layers of financial controls and auditing for our small business.

We hold a number of insurance policies, the most costly of which is our media liability insurance. We use Hotaling Insurance Services as our broker.

In June 2021 we began renting a small office in a coworking space in Downtown Brooklyn for our New York team. We locked in deeply discounted rent on a month-to-month contract, such that we could shed this expense relatively quickly if we found ourselves in a cash crunch.

In November 2020 we began setting aside a monthly budget for reporting and freelance costs. The reporting budget goes towards subscriptions to LexisNexis databases and PACER; Freedom of Information Act (FOIA) requests, like the ones that generated nearly 2,000 pages of court documents related to the Chauncey Billups sexual assault case; and recently, travel costs for on-site reporting that lead to pieces like Courtney’s Story and this Houston Texans training camp blog.

We commissioned freelance pieces from approximately 50 writers during our first year of operation, the vast majority of which were covered under the freelancer policies we announced in partnership with the National Writer Union’s Freelance Solidarity Project in December 2020. We were proud to publish all of these pieces—many of which immediately paid for themselves through incremental new subscriptions—and spotlight the writers and their voices on Defector.com. To highlight just a couple of freelance blogs we were thrilled to have commissioned, here are some pieces that generated an outsized number of pageviews or new subscriptions:

Explanation of our cooperatively owned operating model

All full-time employees of Defector have ownership stakes in the business and are expected to contribute to the operations and democratic governance of the organization. The original co-founders split the initial equity of the business equally, and all subsequent employees have been granted economic interests through our company team distribution plan. Defector Media is a member company of the U.S. Federation of Worker Cooperatives.

As laid out in Defector’s organizing documents, the following decisions require a two-thirds company vote:

  • Selling, merging, or liquidating the business
  • Raising equity funding or obtaining meaningful debt
  • Firing or hiring executives
  • Making appointments to or otherwise restructuring the Board of Directors
  • Amending any provisions within our organizing documents

All of the voting rights are only available to shareholders who are active employees. Once someone’s employment with the company ends, they no longer have any voting rights or say in the strategic direction of the company. The way we’ve decoupled financial stake from voting rights is by creating two classes of shares. The regular shares are only available to active employees. When an employee leaves, their shares automatically convert, on a one-to-one basis, to non-employee shares that retain no voting rights or rights to dividends. The only value of the non-employee shares would be if the company were subsequently sold, and the non-employee shareholders would participate in the proceeds of a sale (which is a highly unlikely outcome now and in the foreseeable future).

While Defector’s organizing documents describe how to resolve questions regarding high-level governance issues, we also needed a framework for day-to-day decisions to avoid defaulting to either consensus-driven or loudest-voice-driven decision-making. We generated a list of dozens of decisions across operations (Should we open a new role, and which candidate should we hire? What should be included in the operating budget?) and editorial (How does editorial calendar and scheduling get set?) and assigned decision authority using the RAPID decision-making model.

In many cases, decision authority has been assigned to the Board of Directors or to a standing committee. The Board of Directors is composed of the Editor-in-Chief, Vice President of Revenue & Operations, and annually elected Editor and Writer representatives. And the company has four standing committees at the moment:

  • Culture & Human Capital Committee, which maintains the employee handbook, prepares HR-related trainings, and facilitates restorative justice issues
  • Events Committee, which plans and executes on digital and live events
  • Growth Committee, which pursues initiatives to grow company revenue
  • Performance & Celebrations Committee, which manages performance/feedback processes and handles celebrations of employees’ birthdays and special events

Every Defector employee is expected to serve as a core member of at least one standing committee, and all are welcome to suggest ideas to any committee and join any committee’s meetings. We’ve also laid out a process for forming temporary committees to tackle discrete, time-bounded problems that may not fit squarely within an existing standing committee’s purview.

Details about our employee policies and handbook

We spent several months designing HR policies to reflect the type of workplace we all wanted to inhabit, with special emphasis on some items none of us had previously seen in other workplaces. Some of these policies that are worth highlighting:

  • Anti-online harassment policy: Defector contracted with DeleteMe for their ongoing privacy protection plans and put in place additional steps to support each other in cases of doxxing or intense online harassment.
  • Leaves of absence: We provide for six months of fully paid family or medical leave, regardless of gender.
  • Paid Time Off: We offer unlimited vacation days, with a recommended 20 days per year in addition to federal holidays, and set clear expectations and definitions for disconnecting in hopes that all staff can avoid burnout.
  • Restorative justice: We’ve implemented a restorative justice framework, rather than the standard retributive/disciplinary framework, to deal with any conflicts and tensions within the team. Our Culture & Human Capital committee members all underwent training so they could serve as facilitators for the restorative justice process. (We very much recommend the training provided by Janine Carroll at Restorative Now.)
  • In place of a standard top-down performance review process, we’ve implemented a more self-directed ongoing goal-setting program, with coaching and feedback processes in place to keep people accountable to their own goals. (Note that editorial and operational leaders do have the responsibility to communicate and address underperformance issues, and we have articulated processes for how they can do so.)

Many of the above policies deviate from typical HR practices at media companies or companies in other industries. Some of them may appear to tradeoff against financial results (though we would dispute that, as we believe investments in employees via thoughtful HR policies will result in higher long-term retention and performance, thus being a net positive to the bottom line). But some of them do not require any financial tradeoff at all, and instead simply require a higher degree of trust that employees will be self-motivated to deliver high-quality work in an appropriately supportive environment, that they can work through conflict with one another without HR stepping in, that they can set goals for themselves that are the right levels of ambitious, and that they’ll take advantage of supportive policies without abusing them.

About our community of subscribers

With 95% of our revenue coming directly from subscribers, we literally would not exist without their support. 

The large majority of our interactions with our subscribers—mainly through the customer service inboxes and comment sections—are pleasant and respectful. The number of commenters we have banned so far is smaller than the number of subscribers who have emailed to ask us to delete a comment they posted that, on reflection, they realized was ruder than necessary. And sometimes our commenters have really gone above and beyond to support the Defector team and subscriber community: Chris Buecheler provided technical advice about our comment section integration that our Lede developers actually incorporated in their troubleshooting, noodlesintheface sent an enormous order of donuts to our coworking space one morning, and we’ve chased several stories based on tips left in the comments.

In Year 1, our commenters largely did a great job of trying to say insightful or clever things instead of getting into flame wars. We feel confident that they will continue to uphold that approach in Year 2 to maintain a healthy, welcoming community in accordance with our commenter guidelines

We do have some sense of the demographics of our subscribers, based on a combination of Google Analytics and the subscriber survey we ran in January, which roughly 7,000 people (representing ~21% of all subscribers at that time) completed. Based on these inputs, we estimate our subscriber base breaks down as follows:

  • About 80% are between the ages of 25 and 44
  • About 75% are men
  • 45% have a paid subscription to the New York Times and/or the Washington Post; 30% to The Athletic; 20% to The New Yorker and/or The Atlantic; 75% have at least one paid subscription to a newspaper, magazine, or digital publication other than Defector; 98% pay for a streaming video or music service
  • 90% have a college degree; 40% have an advanced degree; nearly 10%, hilariously, are lawyers

Of course, there are caveats about survey data (chiefly, that those who respond may not be representative of the whole population), but the idea that there are at least 700 lawyers in the Defector comment section would not be misaligned with anecdotal evidence.

What we hope to accomplish in Year 2

Though Defector had a modestly successful first year of existence, we face the same primary issue as any subscription business, commonly known as “the leaky bucket” problem: To keep subscription revenue flat—let alone grow it—we have to gain new subscribers at a fast enough pace to offset the ongoing churn of existing subscribers. Much of our efforts in Year 2 will be aimed at retaining and gaining subscriptions to the website (though we will also be doing some work in other channels, like with new podcasts, events, and continued Twitch programming).

We hope to invest ahead of revenue somewhat and hire more full-time editorial staff, which would expand our coverage areas, increase the quantity and quality of blogs on the site, and allow us to take bigger risks editorially. When we put out a call for the Staff Writer role in January 2021, we received nearly 700 applications. The amount of edit talent available in the current media landscape is staggering, and we hope to take advantage of that sooner rather than later. We know that our existing staff is not nearly diverse enough in race and gender, and we absolutely must improve via our hiring process.

Also on the talent front, we hope to grow our monthly freelancer budget, with a focus on publishing freelance writers new to Defector, and we expect to hire editorial interns for Summer 2022 and are beginning the process of shaping an internship program.

Beyond the direct enhancement of the editorial product, we will try to grow our potential audience and/or strengthen our existing community of readers through:

  • Ongoing improvements to the functionality and stability of the website. As one example, Lede is rolling out several new features for the commenting system. Any Pal or Accomplice subscriber can go to CommentsMy Profile → Preferences and turn on email notifications for replies to their comments. We are also actively testing commenter avatars and name change functionality.
  • Free subscriptions to students, underwritten by contributions to our Tip Jar.
  • A more systematic approach to “PR” that ensures our breaking news and investigative reporting stories reach as broad of an audience as possible.
  • Experimenting with more targeted content and offers to potential subscribers.
  • Potential partnerships (in addition to the ones we already have with sites such as Baseball Prospectus and Discourse Blog) with like-minded publications and networks.
  • Some investments in paid advertising, as well as organic improvements in our SEO and discoverability from simply existing on the internet for an additional year.

Outside of the core subscription business, we intend to diversify our revenue sources, at least a bit, with:

  • Two new podcasts, to be formally announced in the coming months, that will be hosted on the Audioboom podcast network.
  • Semi-regular ticketed live events that will also be livestreamed. Any such events in Year 2 are likely to be held in New York City, and we will follow all CDC and NYC guidelines regarding the ongoing pandemic (including canceling events as necessary or putting event planning on hiatus altogether).
  • A streamlined, repeatable pipeline of site sponsorships with smaller brands.

On matters purely internal to Defector’s operations, we will continue making this company a destination place to work within the media industry. By doing the work to sketch out career paths and growth opportunities over the next year, we hope that no one will ever leave Defector because they felt they reached their professional ceilings here.

Your input

We are very proud of the business we have built so far and the community that has developed around it. That being said, we are all first-time business operators, and there is surely room for improvement on nearly every dimension (see: Big Dumb Idiots Who Don’t Know What They’re Doing above). We would welcome any thoughtful constructive feedback or advice you might want to offer. Feel free to email jasper@defector.com, tom@defector.com, or your favorite Defector writer with the subject line “You fool, you absolute buffoon.”

Thank you for your continued support of Defector. See you tomorrow.