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).

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Motor

I love your insight/observations. Good stuff, although admittedly its a bit rough to wrap my head around this all because I think whats more of problem than getting even a million users…. is that I’m having an impossible time finding someone thats really good at Web Dev to work with me on my idea to get something started. Everyone wants to know what it is I’m developing, and when I tell them what it is, they love it, yet noone wants to team up and actually build it.

With so many developers with $$ in their eyes, they feel they dont need a business partner to build their own idea. I was recently told by a web dev guy, ” I don’t know anyone that wants to do speculative work on other people’s ideas. Everyone I know has their own ideas. And if they’re gonna work for free, they’d rather build their own dreams. No disrespect.”

I’m really hoping that this isn’t the general opinion of all developers.

Anonymous

It is for the good ones.
http://ohheyworld.com/ Drew Meyers

You’ve gotta realize their opportunity cost. Any really good web dev can show up in San Fran, Seattle, NY, Boulder, Austin, etc — and get a 100k+ salary within a couple days if they really wanted to with any startup they want.

I’m going through the same thing wrt recruiting a technical co-founder…and ultimately, for anyone to go all in with you and work for free, they need to a) believe in the idea, b) want to solve that problem in their own lives (don’t underestimate this), c) know what YOU bring to the table, and d) have worked with you, trust you, etc. to know that you can and will execute & raise money when the time comes.

http://www.vikramadhiman.com/ Vikrama Dhiman

Really interesting. And thanks to Twitter for sending me here.

At the risk of sounding naive and newbie, I ask, what are corresponding numbers for e-commerce companies? Is $1 million in revenue per year anything at all? What other numbers would be worth looking at/ tracking?

http://www.cdixon.org/ chris dixon

It really depends. Rev, rev growth rate, CAC, market size, etc.

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http://www.facebook.com/rongura Ron Gura

@cdixon:disqus got it right.. those days are behind us – there’s nothing like numbers to screw up a good story
http://tonepedia.com/blog Danny Strelitz

If I am reading correctly between the lines, its harder to get money, period. if you are doing consumer, you’re bar is higher, if you are doing e-commerce you start up with a high bar – usually a more complicated product with a more complicated market.
So in any case you are going to need a lot of money to get above the bar, which you aren’t going to get.

http://about.me/thinkstorm Thorsten Claus

Reading through 10 days of comments. I don’t think it is harder to get money, I think it is just easier to start. And just because you started doesn’t mean you get money.

Getting 10m users now is as hard as getting 1m users five years ago. And because of different revenue/cost configurations of (non-transactional) startups you actually need that much more volume to be successful (prevail over competition).

I see the timing when a VC invests more coupled to the level of trust that the team can execute: If I invest once you have 10m users (promising me 100m) I am pretty far along and probably someone else took some major risks before me, and I will also join a round that “spreads my risk even further” (=the misconception of being save just because a big VC is joining as well). If I invest at a 100k user stage maybe I believe and trust that you and your team can grow to 10m within reasonable time.

http://u2697.wordpress.com/ D Sushant

Thanks for the insight. It would help if you can qualify your definition of “user” since its mentioned in the context of different business models:
1. “…with non-transactional models…you need something closer to 10 million users versus 1 million users to get Series A funded.”
2. “…with transactional models, e.g. e-commerce, the number of users required is often far lower…”

What would be the composition of users types & the level of engagement expected of the set of 10 million users vs the lower numbers with transactional models?

http://www.cdixon.org/ chris dixon

I deliberately left that vague because it depends on the type of service/website/app.

http://twitter.com/lchamberlin Luke Chamberlin

I have been in situations where the number of users reported by a startup was extremely suspect.

How much due diligence can an investor do before they just have to take the word of the developers and their homemade reporting mechanisms? This might be another factor driving baseline number of users required for investment up. Faking users is incredibly simple, not to mention that there are companies overseas that “sell” active users.

Revenue on the other hand is more difficult to fake, as are B2B contracts.

http://www.cdixon.org/ chris dixon

VCs often ask for google analytics passwords etc, but ultimately there is a lot of trust in VC investments.

http://clintonwu.com/ Clinton Wu

Eh maybe I should scrap my non-transactional consumer startup. Nah.
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http://twitter.com/joshelman Josh Elman

I think Chris Phenner’s comment is really insightful here. The biggest change I have seen is that consumers now play with an order of magnitude more products and services than they used to. This all thanks to the ease of spreading and signing up with Facebook, twitter, App Store and Google Play. The downside is consumers delete apps, ignore emails, and stop returning to something they downloaded, visited, or even signed up for faster than ever. I don’t think the numbers of consumer investing has changed as much as the frame. They key question is and has always been “what signals indicate you will be a much bigger and more widely used service in the future?”. But today’s answer isn’t just 1M users as a good sign but a much more nuanced understanding of retention and durable patterns of growth and activation.

http://www.cdixon.org/ chris dixon

Yeah you are right there are other ways to show you are on your way to be a big hit, but for your basic web-based ad supported product (e.g. blogging software), 1M won’t cut it the way it would, say, 5 years ago.

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Franca Condo

I hope the FTC/SEC blocks Facebook from buying one of its strongest competitors — Instagram. Instagram is a photo based social network that now has 100,000,000 users. its one of the strongest competitors facebook has seen to date. Facebook has network effects. Without network effects Mark and Co. would have had strong competition a long time ago. Instagram is one of the few companies that found a hole in Facebook’s armour through its early jump on mobile platforms. It would be a shame to simply watch Facebook buy away the competition. Do the right thing FTC/SEC and block the buyout. Make Facebook compete.
http://twitter.com/arikan Burak Arikan

Social commerce startups (e.g., Svpply, Fancy, Nuji) seem to have affiliate based revenue from many stores. To me they are a hybrid of transactional and non-transactional. What do you think?

http://www.cdixon.org/ chris dixon

Yes, although there is VC skepticism around affiliate businesses. Very few large companies have been created with affiliate business models (Kayak is an exception).

http://twitter.com/rifoyn Nick H

So you arent seeing a good story make crappy terms without the user metric in A? no exceptions, seems as though the cash needs somewhere to go so why not exploit the situation. Dilution sucks for the founders but atleast the story even a diluted story gets to live on. Bridging in this scenario becomes a subsidy to avoid complete loss of seed round, the first in investors are going to have cash problems which can lead to system failure, good thing crowdfunding will be live soon. Any thoughts on first in cash drying up?

http://www.cdixon.org/ chris dixon

There are always exceptions and nuance. I’m generalizing here.

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http://www.facebook.com/chris.maloney.731 Chris Maloney

Chris, what do you think of social game SongPop – it reached a FB user base of 12 million in 10 weeks?

Also, do you consider social games to be non-transactional or transactional?

http://www.cdixon.org/ chris dixon

Virtual goods models are transactional. Zynga’s problem isn’t monetization on the *desktop*, it’s the switch to mobile.

Richard Jordan

Great article. I believe you’re self-evidently right on this. It is fairly clear if one is paying attention. I also think that there’s a necessary consequence of this that a lot of less experienced entrepreneurs aren’t thinking of:

There’s going to be a shake-out of Angel investors. A lot of what is impolitely known as dumb-money came into Angel investing in recent years – folks who made a ton of money in someone else’s startup and think they’re entrepreneurial masterminds, and who then funded a bunch of 20-somethings who played to that ego. This isn’t really the names we all know that I’m speaking of – as they’re well known Angels usually based on a track record of making good decisions, by and large. But there are a ton of Angels, who most of us have never heard of and will never hear of, making these investments in thousands of consumer startups who are starting to learn that it’s hard being an Angel investor. It’s tough getting your company to Series A and a realistic chance of taking flight. A lot of them will wash out and not come back, I suspect.

This is also why when people are ranting on Hacker News about the immorality of acqui-hires they are perhaps missing the fact that there’s going to be a lot of consumer startup failures coming and a lot of folks looking for gigs in more established companies that will WISH they were acqui-hired.

The good thing is that like many others I think talent has got very diluted in Silicon Valley due to the ease of getting a small angel round done in consumer Internet startups. As it gets harder to raise funds and this starts to filter down the food chain we’ll see more folks learning their craft and waiting to put their wood behind a really good arrow instead of jumping on the first idea they have after a couple of beers at their first Silicon Valley social event.

IMHO

http://www.cdixon.org/ chris dixon

Agreed re shakeout of angel investors. I also find that anti-acquihire thing on HN nutty.

http://www.justanentrepreneur.com Philip Sugar

If you are old like me this will be the third major shakeout of angel investors. The first I saw was in the early 90′s after the PC market slowed with the recession, the second was the dot com explosion, and this will be the third.

I think acqui-hiring is the one thing that I did not count on that will actually help angels and incubators like 500 startups. Now instead of losing all of your angel money you can make it back in an acquihire.

In the past if your startup imploded everyone lost their money and you needed to go find a job. Now its almost like a talent agency, an angel puts up the money so that you can prove your talent. If you become a huge star great hit, if not yes the agency is going to take a big cut, but they put up the money.

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FAKE GRIMLOCK

SOCIAL NETWORKING MEAN ACCIDENTALLY GET MILLIONS OF USERS EASY.

NOTHING EASY VALUABLE.
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http://www.thesecomefromtrees.com petekazanjy

Chris! Stop that!

If VC A round expectations are reset to 10m instead of 1m, how am I going to spend my seed money acquiring users in third world countries via Facebook ads, and running them through spammy viral acquisition loops to juice my AppData standings in advance of my next round!

Can’t you just leave well enough alone?

http://www.cdixon.org/ chris dixon

heh.

Anonymous

Great post Chris!

I think your observation is supported by changing economics:
1) Winners achieve much larger valuations, much faster (see Albert’s post a few months back
http://continuations.com/post/19000949472/a-rational-internet-venture-valuations-bubble )
2) for a given target expected value of a Seed Round, a larger outcome in case of success means that a lower probability is acceptable

3) it’s cheaper and faster to test an idea

Hence it makes sense to have “Thousands of early-stage consumer web/mobile companies started and funded in last 24 months”
for “only a few dozen VCs who actively write consumer Series A checks”

This means that it is indeed “the most competitive sector in tech in the last decade”
.
Conclusions:
- for angel investor: write small checks and diversify
- for entrepreneurs: try quickly and move on fast (don’t stick to losing ideas)

http://www.cdixon.org/ chris dixon

I agree. I think it could work out for smart investors who understand the logic. The thing I worry about (and why I wrote this post) is entrepreneurs entering the space who don’t realize how competitive is.

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http://arnoldwaldstein.com/ awaldstein

Thnx Chris…

You mention that many startups are moving from a media to a transactional model. Makes sense in the context of funding that you describe.

Gathering people to drive media type revenue and selling something even if it’s lead gen are different businesses at their core not just a different model.

I think you are right. But I think this will thin out the ranks of the startup world. It’s one thing for the consumer to be barraged by ‘try me’ models. Choice and action slow down when there is a price to play.

Where do marketplaces play into this change? There’s more and more of them and they seem a model for the times.

http://www.cdixon.org/ chris dixon

I think of marketplaces (and other companies that take a % of transaction, e.g. payments) as transactional. Agree that marketplaces seem increasingly important.

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https://twitter.com/truely_me007 truelyme

I don’t know about statistics, but what I see as an end user is that I am more comfortable at FB.
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http://twitter.com/josephzhou Joe Zhou

Consumer startups with no tech = worthless
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Chris Dixon