The changing dynamics of consumer internet investing

Fred Wilson wrote yesterday about changes in the consumer web and their implications for startups. Frist he observed that the large platforms (Google, Facebook, Amazon, MSFT, Twitter, etc) are ‘starting to suck up a lot of the oxygen’ making it ‘harder than ever to build a large audience from a standing start’. Secondly, he notes that the move from ‘desktop/web to mobile/app’ makes it more expensive to build a large user base, principally because of the need to develop for multiple platforms.

These changes are altering the dynamics of investing in consumer web companies. Historically the best of these businesses have been highly capital efficient and able to grow very fast on the back of the strength of their product and without dependence on a third party. This made consumer internet a very exciting investment category – this Pinterest case study shows why. Going forward the risk reward profile will be different. Higher development costs and dependence on the large platforms push the risk up and at the same time the chances of hitting a Facebook size winner have fallen (it is hard to see any of the large platforms allowing that to happen).

This doesn’t mean that the opportunities in consumer web are over. It does mean that going all out to build a huge audience without building in a solid business model from day one has become a riskier bet where success is largely predicated on one of the platform players acquiring the company. For me the sweet spot has now shifted to businesses that are able to able to extract a high ARPU from a focused community. Often times that will mean the companies are ‘close to the transaction’ or ecommerce related. These businesses can be capital efficient in spite of mobile development costs because they are able to generate meaningful revenues fairly early on and they can have great operational leverage which combined with high ARPUs allows them to generate significant profits from audiences in the tens of millions.

Lyst and MoviePilot are good examples of businesses from our portfolio that fit into this category.

  • http://twitter.com/picturetheuk James Penman

    Hi Nic,
    ‘Audiences in the tens of millions.’ Out of interest, is that uniques per month or year?
    Cheers,
    James

  • http://www.theequitykicker.com brisbourne

    Per month

  • http://twitter.com/picturetheuk James Penman

    Cheers Nic. And, if possible, what sort of ARPU for a year?

  • http://www.theequitykicker.com brisbourne

    That depends on profitability. I’m loosely thinking that you want to see the potential for a minimum of $10-20m of profit in the company and $50m in the market over a 5-10 year time horizon.

  • http://twitter.com/picturetheuk James Penman

    Thanks :) Yes, I can see how those numbers work off the audience figures used. Very interesting.