Investing in iPhone Startups (Part 2): The VC Way
Joey Lo | Jan 13, 2010
We’ve looked at the stats and prospects of iPhone, iPod Touch, and App Store in Investing in iPhone Startups (Part 1): The Prospects. The numbers are encouraging and the downloads are downright inspiring (3 billion and growing with no end in sight).
BUT, barriers to entry is low and there are heaps of other issues to consider. With all ‘em challenges and all ‘em developers itching to try their luck, how do you identify startups that have good potential?
Let’s take a look at the kind of startups VCs are backing and the things they said about the space. This will at least give you some clues as to what criteria should be met, which could save you some time in the screening process should you decide to back an iPhone startup.
I. Target
The key is to look for iPhone startups whose goal is to build scalable businesses, not individual developers who are just hoping to hit the jackpot.
II. Exit
Investors typically make money upon exits (e.g. M&A, IPO). They expect the startups to have an exit within 10 years.
For KPCB, it invests in companies that have the potential to become standalone, public companies. Successful investors aim big and look for homeruns.
III. Focus
KPCB has its hearts for location based services, social networking, mCommerce (including advertising and payments), communication, and entertainment.
For aggregate data, ChubbyBrain offered a breakdown of companies per industry that have received angel and VC funding. Industries that appear relatively hot within the iPhone ecosystem include: social network, gaming & entertainment, diversified application development, information provider, and monitoring & security.
IV. Multi-Platform
iFund manager Matt Murphy told mocoNews that they’re not betting solely on the iPhone platform. “Over time, most companies [in the fund] will eventually diversify to other platforms.” This is important as portfolio companies can leverage the popularity of other platforms like Android.
Case in point: Most recently iFund-backed GOGII has released its textPlus app for Android.
V. Business model
How do the companies make money? “Majority of apps right now are moving towards, or are pursuing a free ad-subsidized model, or a model using virtual goods with some apps being a paid download or monthly recurring charge,” said Murphy. “90 percent will be monetized by advertising, virtual goods, or some form of affiliate fees or commerce.”
A word about micro-payments: With the golden price point being US$0.99, your investee will need to sell a whole lot to ensure you get the great ROI. Is the market for the app there and is it big enough?
And take note of the freemium model. Mobile knowledge portal MSearchGroove (MSG) cited studies from Pinch Media which showed that iPhone app usage drops significantly after 90 days as novelty wears off. The iPhone startups you’re evaluating must be quick and meticulous in releasing apps. Fredrick and Rainey note that a clear and compelling upgrade path is a must.
While [the freemium model] works in some sectors, overall, the gap between free and paying customers is widening. This is happening because buyers can be very fickle. As their attention spans shorten, their brand loyalty diminishes as well.
In the mobile space, for instance, a game or app that’s hot today can easily be forgotten tomorrow. Users have little or no incentive to upgrade, so they just move on to the next trendy, free offering. Providers must innovate at an incredibly rapid pace in order to keep pace with market demand. But they can’t be careless – offerings must be thoroughly tested before they go public, since most people won’t give something a second chance if they’re unhappy the first time. And these providers must have a clear and compelling upgrade path to entice a larger percentage of paying customers.
Of course, you’d want to do your due diligence and look at other factors like the startup team, the company’s competitive edge, piracy concerns and go-to-market issues before opening the checkbook. But now that you’ve gained a clearer picture of what a fundable iPhone startup looks like, it’ll help you filter out a good chunk that obviously don’t fit the bill and give you an easier time to find that special company that hasn’t reached the VC stage. You might come across it in 3 to 5 days or 3 to 5 months, or you might never find one that steals your heart.
Just to give it some context, iPhone startups received between US$15,000 and US$15.5 million from VCs and angels as of June 2009, according to ChubbyBrain’s aggregate statistics. For the initiated, there’s plenty of room for individual angels and angel groups to play.
Filed Under: Angel Investing Basics • Picking Winners • Research Findings
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Thanks for your comment.
You might have misunderstood the purpose of these posts and the platforms VCs are investing in.
1, 2 – We wrote the golden price point is $0.99 and it’s linked to a further discussion. When you haven’t even met the startup you’re going to back, there’s no way you’d know its business model and price point. $0.99 is a conservative number. And even at several bucks an app you still need a big market to generate a good return.
3. Investors are backing startups that extend the iPhone and iPod Touch platform. Both data must be looked at.
4, 5 – Was mentioned in part 1 and linked to further analysis.
6 – Good point. But do understand that our focus is on the kind of iPhone startups VCs are backing.
7 – Again, our focus is on iPhone and iTouch platform and what VCs are backing. And we’ve mentioned multiple times that the investing decision rest on the reader. We’re not advocating people to invest in iPhone startups, but to help the initiated to filter out those that obviously don’t fit the bill.
8. That’s one of the points we study the kind of iPhone startups VCs are investing in. Read multi-platform.
9. We can add these bits to make it a little clearer: “Of course you want to look at other factors, such as the startup team, the company's competitive edge, piracy issues, and go-to-market issues.”
10. See part 1 – users are using the apps 30 times more compared to other devices. Then part 2 – multi-platform.
We appreciate your contributions and making this a better post.
Thanks for your comment.
You might have misunderstood the purpose of these posts and the platforms VCs are investing in.
1, 2 – We wrote the golden price point is $0.99 and it’s linked to a further discussion. When you haven’t even met the startup you’re going to back, there’s no way you’d know its business model and price point. $0.99 is a conservative number. And even at several bucks an app you still need a big market to generate a good return.
3. Investors are backing startups that extend the iPhone and iPod Touch platform. Both data must be looked at.
4, 5 – Mentioned in part 1 and linked to further analysis.
6 – Good point. But do understand that our focus is on the kind of iPhone startups VCs are backing.
7 – Again, our focus is on iPhone and iTouch platform and what VCs are backing. And we’ve mentioned multiple times that the investing decision rest on the reader. We’re not advocating people to invest in iPhone startups, but to help the initiated to filter out those that obviously don’t fit the bill.
8. That’s one of the points we study the kind of iPhone startups VCs are investing in. Read multi-platform.
9. We can add these bits to make it a little clearer: “Of course you want to look at other factors, such as the startup team, the company's competitive edge, piracy issues, and go-to-market issues.”
10. See part 1 – users are using the apps 30 times more compared to other devices. Then part 2 – multi-platform.
We appreciate your contributions and making this a better post.
You may have overlooked 10 key mobile industry issues:
(1) Firstly top selling is not the same as grossing, look at the top grossing iPhone apps and how many are at $0.99? Look at sales of Sat Nav TomTom, people will pay for quality product. Pinch Media http://bit.ly/3yX5f5 shows that key price is $4.99 and other research shows the mean price of Top 100 grossing apps is over $5
(2) Games remain dominant – at under 15% of new app releases but normally make up 2/3 of Top 10 selling, Top 10 grossing, Top Free and the What's Hot List. EA Mobile had record profits last year. As an example – In the UK (2nd biggest App market) on 3rd January, Doodle Jump was top selling app at £0.59 ($0.99), but only #18 grossing app and #14 grossing game
(3) People often include iPod Touch data within iPhone smartphone data, whilst the iPod Touch is a mobile device it is not a smartphone and can confuse data.
(4) The new major mobile markets will be Asia & Africa, in Asia the mobiles have huge growth (India 16m new phones per month) and markets (China 700m phones), with world leading capacity and infrastructure (Japan and South Korea). Asia is also huge into gaming and virtual goods, key revenue generating areas
(5) Outside the US/Europe – many countries use mobiles as their primary infrastructure and communication media. Thus mobiles are use for banking, micro-payments and other forms that often would not make commercial or practical sense elsewhere. In the future, many big Asian and African mobile industry players will be able to scale to hit the West but how many Western ones could do the reverse
(6) Piracy as not been mentioned, ngmoco reported 90% piracy rates on some of its games. Also jailbroken iPhones were subject of a mobile virus before Christmas with a malicious Android phising app in the news recently. These will become increasingly common
(7) Handheld devices, app-stores talk of money and billion downloads but the real money making mobile device is the Nintendo DS, 100m+ units sold, maybe $8b games sales in 2009. This is where investment should be
(8) Infrastructure, O2 in the UK and AT&T in US highlight that as mobile operators and infrastructure are increasingly under pressure from data transfer and downloads. How will this infrastructure be able to sustain exponential growth in apps, downloads and mobile data over the next 3 years? Will this not restrict growth?
(9) App-stores, still coming on board but are still causing many problems as people are often restricted to one particular app-store – these still remain a major go-to-market issue which people overlook. In addition, discoverability on and off app-stores is now becoming major issue for developers
(10) What about Web Apps or Flash based apps, these require WiFi but they are much quicker and cheaper to establish plus avoid app-stores and are easily and instanteously viewed across a range of mobile, handheld, netbook, PC, tablet, etc devices. Google's Nexus One has only 190Mb for apps and Palm Pre are more focused on web apps, so maybe that is the future…
The market is definately growing though
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