Ten million users is the new one million users

Entrepreneurs and investors have been enamored with consumer internet startups for the last few years. But there are signs this is ending.

Some observations:

- Thousands of early-stage consumer web/mobile companies were started and funded in last 24 months.

- There are only a few dozen VCs who actively write consumer Series A checks, and those VCs will only do a few deals a year.

- Facebook’s market cap is about half of what most tech investors expected before the IPO.

- A few breakout early-stage consumer hits (Instagram, Pinterest) have reached tens of millions of users in record time.

- Internet users have tens of thousands of services/apps to choose from but limited time and attention.

Some consequences:

- For consumer startups with non-transactional models (ad-based or unknown business models), you need something closer to 10 million users versus 1 million users to get Series A funded.

- For consumer startups with transactional models, e.g. e-commerce, the number of users required is often far lower because revenue is the more important metric. Hence, many early-stage consumer startups are switching to transactional models.

- It’s becoming increasingly common for early-stage consumer startups to do bridge financings (raising more money from past investors, usually on terms similar to the prior round) instead of Series As.

- VCs are increasingly focusing on B2B for early-stage investments.

- There will be a lot more consumer talent acquisitions.

Some advice:

- If you are thinking of starting a non-transactional consumer startup, be aware that you are entering what is perhaps the most competitive sector in tech in the last decade.

- If you can raise more money, do it. (Especially pre-launch: remember, there’s nothing like numbers to screw up a good story).

- Be prepared for lower valuations for non-transactional early-stage consumer startups (breakout later-stage companies, on the other hand, will likely continue to command high valuations).

2 thoughts on “Ten million users is the new one million users

  1. Pingback: Trackback
  2. Pingback: Trackback

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s