Angel Investors Thinking Twice About Funding Pure-Play Startups

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According to GigaOm’s Om Malik, angel investors are thinking twice about funding pure-play startups – single-platform focused companies whose profits often bypass investors and developers and go home with platform owners.

When hot startups enter the market, entrepreneurs go crazy trying to discover new ways to capitalize on their success.

Think Twitter. Think Facebook.

Malik offers his perspectives on platform owners and pure-play/single-platform companies:

Historically, developers have had much less control over their destiny than platform owners. Take Facebook. It has played the developer community like a fiddle with its recent actions (and ad-hoc changes). And platform owners always play favorites. Intel had Dell, eBay picked PayPal, Facebook chose Zynga.

Similarly, some of Twitter’s recent actions, such as imposing limits on companies building ad-related businesses on Twitter, have thrown developers into a tizzy, Malik writes.

Chris Dixon, founder of VC fund Founder Collective, suggested angel investors and VCs are pulling back on outlays within the Twitter ecosystem.

“Expect investment in ecosystem to drop significantly,” he recently tweeted. Later Dixon added: “A bunch of investors told me recently there is no way they’d invest in Twitter ecosystem now.”

Angel Investors No Longer Playing Ball With Pure-Plays

A raft of other angel investors were willing to anonymously add their opinions to Malik’s draught. They did mention their interest in Twitter-related startups but they also tabled the main reasons why many investors aren’t playing ball with pure-plays right now.

To start with, angel investors have staged their exodus from pure-play Twitter startups due to proof that the micro-blogging company still lacks the business ecosystem to support returns to venture investors.

One investor put it concisely: “Twitter is more of a broad distribution platform for customer acquisition than an investment platform.”

Another believed the economic interests of Twitter and their hard-working, but often forgotten, developers need to be aligned before its ecosystem will pose a good investment option.

To do that, Twitter needs to first become profitable. “One needs to wait until Twitter becomes profitable before investing in its ecosystem, since that’s the point at which the company will likely embrace it,” shared the investor.

All in all, the article serves as a good reminder to investors: Remain vigilant when filtering single-platform companies. Like celebrity VC Fred Wilson said, “You can’t simply develop [or invest in] stop-gap products for the company’s service, because Twitter will end up filling those holes.”