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