A recent Wall Street Journal article pointed out the lopsided investment patterns now seen in Silicon Valley. According to the WSJ, a lot of money has been poured into consumer companies, lured by the high valuations of high traffic sites like Facebook (king of them all) and Groupon, and hopeful consumer plays like Color and FlipBoard. Less and less is being invested in “old fashioned” B2B businesses with a few notable exceptions. The article points out, correctly, that typical B2B products cost more to build, take longer to gain market traction, are a lot harder to sell and have smaller chances of becoming viral hits. Personally, I think consumer companies actually cost investors more than business-facing software startups and the lopsided investment pattern is an indicator of that fact.
Getting a smashing hit with consumers simply takes a lot more luck, and, therefore, requires a bigger bankroll. It is a high stakes game. Angry Birds may not have taken a lot of cash to build, but probability-adjusted, the investment was expensive. Consumers are unpredictable. What’s hot, popular, and viral, is very difficult to determine until it becomes obvious ex post facto.
On the other hand, most businesses’ actions are formulaic. There are costs and there are revenues. Show a business a way to increase revenues or decrease costs and, if you are believed and have a few reference customers to back up your claim, you can sell your product to a department with the right budget. It is not hard to justify buying a Salesfoce.com seat if you can show that with very little upfront costs your sales process will be more manageable and effective. And even isn’t hard to get Bloomberg terminals on traders’ desks if the second advantage in speed and efficiency of information delivery will more than compensate for a hefty monthly fee.
With consumer-facing products, things are different. If someone came into my office and showed me an game that let me fling birds out of a slingshot at burbling green monsters sheltered by brick walls, I would have called it “fun” but would have not invested. Especially, I would think twice about investing in a company started by three Finnish students six years prior with a string of J2ME titles to their names (see Rovio). And I would have missed the boat. I would have told them to see how thing go, and after that little bird-flinging app got downloaded 42M times, the big boys at Accel et. al. would step in and fund the company to the tune of $42M.
I find that I have adopted the prevalent lingo of the consumer internet and have now, unfortunately, started to ask for “tangible traction” before considering a consumer-facing investment. Why? Well, my theory is that asking for traction is another way of saying “Who knows?” and recusing oneself from placing a bet on something as fickle as popular sentiment with which I, and most other VCs, are out of touch — different demographics: age, income, gender, etc. “Traction” means that whether I get it or not, the public get it first and provide proof of its acceptance on a silver platter. Now, investing becomes closer to shooting fish in a barrel instead of placing a risky bet on a bunch of birds crashing into walls.
Unfortunately, investing in ideas that have already won in the public arena is expensive. And not too many investors can afford to play at these high stakes. This is why the overall dollars invested in consumer companies is high: it takes a lot of small checks for the failures and a few giant checks for the successes.
So, what’s an investor like me to do? Well, if you don’t mind placing lots of smaller bets on companies that have a chance of “going viral” — consumer is the glamorous space. There are more and more seed funds doing just that. The only problem here is that it still takes a cartload of cash to followup on those investments once the companies prove they have a hit on their hands and the most you can hope for is a tiny piece of a giant pie. On the contrary, if I have to place bets, I’d rather place them on technologies that are likely to succeed on the merits of the value they are offering rather than a consumer’s whim. Don’t get angry: I mean “whim” as in “whimsy” — a good thing, not as a condescending term.
And I don’t think I am just being conservative. There are exciting new possibilities for unglamorous but incredibly valuable companies that, for example, aim to wrestle with processing big data (CloudEra), try to change the way information is stored (Mongo, Couchbase, fluidInfo, Redis), analyze how our social interactions propagate and influence the world (Klout, bit.ly). There are entire new programming paradigms (node.js and socket.io). There is much exciting technology out there looking to be funded. And these technologies will be the shovels and picks that thousands of B2C miners will be using.
I’ll still be playing Angry Birds and springing for a Mighty Eagle every now and then. But I think I’ll skip the GroupOn clones, social networks for plumbers (there are millions of plumbers in China, you know), and barter sites. Nothing wrong with them and they may all become profitable businesses. I wish all the entrepreneurs working on new ventures nothing but the best. But one has only so many chips to play with.
- B2B Startups: Tech PR for a Tougher Market (customerthink.com)
- Business Startups Don’t Get The Same Bubblicious Love As Consumer Startups (businessinsider.com)
- Facebook’s possible worth? $100B (thestar.com)