What Hasn’t Changed: The Internet Keeps Getting Bigger.

Recent articles by the WSJ, Fred Wilson, & others are noting a shift in investor interest to enterprise and away from consumer. If true, this is a huge error… at least for entrepreneurs, angels, and smaller funds. There is no better time than the present to build cheap & scalable software-based businesses that make money. And while there is lots of new potential for using consumer marketing techniques in the enterprise, let’s not be too hasty in digging an early grave for the Interwebs, shall we?

Having been in the valley for over twenty years, and an investor in startups for almost ten, I’ve seen at least 2 investor cycles of switching back & forth from consumer to enterprise. While i agree with Fred it’s helpful to know what themes downstream investors are funding, IMHO most VCs switching from consumer to enterprise are clueless about why they’re doing so. For the few VCs who do have their shit together and have some domain-specific expertise, i am quite confident they will continue to invest in areas they know well whether the market is up, down, or sideways.

As the saying goes: if you don’t know where you’re going, any road will take you there.

Regardless, though I respect Fred greatly, let me state my position for the record – consumer and small business internet opportunities are FAR from “over”, and any such commentary is foolish, narrow-minded, and simply dead wrong (altho, it may indeed be “over” for most large funds attempting to do seed-stage investing at any scale similar to YC or 500). In addition, i most certainly take issue with the statement that it’s “harder than ever to build a large audience”… nothing could be further from the truth. Almost every possible internet distribution channel has MORE users than ever before – whether it be search, social, mobile, video, local, SMS, email, chat, etc. And for those of us who invest outside silicon valley and new york, the global consumer opportunity is huge as well in Asia, Latin America, the Middle East, and other fast-growing internet and mobile markets.

In fact, the assertion that consumer is “tougher” is so absolutely incorrect and provably wrong that i’m puzzled why anyone would even say such a thing. The number of recent internet services that have grown from nothing to hundreds of millions of users is frankly rather astonishing – Pinterest, Instagram, Groupon, Zynga – all of these took less than a few years to get to hundreds of millions of users and in some cases billions of revenue. While Groupon & Zynga have certainly fallen Icarus-like from higher heights, it’s still the case that both are amazing for how fast they grew and acquired users via search, social, and other channels. Perhaps mobile app distribution can be challenging sometimes, due to Google and Apple still learning how best to offer organic or paid distribution on mobile. But regardless we’ve invested in several startups that have gathered millions of users quickly, and in a few cases tens of millions of users in under a year (ex: 9GAG, PicCollage, Cubie).

But i think most of this discussion is missing the main point. Historically, the venture capital industry has been used to finance high-risk business where significant capital is required to get companies off the ground, usually in two key areas: building product, and acquiring customers. But in today’s world, it’s certainly MUCH cheaper & faster to build product than ever before, and due to the explosion in adoption of consumer platforms, it’s also cheaper to acquire customers than ever before (altho here is where larger VC can be helpful in scaling up fast). This is why it’s such a great time to be an internet entrepreneur – it’s REALLY EASY to bootstrap most internet and mobile businesses to at least the operational stage on a very small amount of cash. But in the early days, capital is nowhere near as important to the company as domain expertise. VCs who don’t have operational experience in building product or internet marketing probably shouldn’t be active investors in early-stage consumer and small business internet services. And clearly this is what we are seeing with the smarter funds – they’re waiting until Series A or B when companies have clear traction before they jump in, when they may require larger amounts of capital to finance growth. However, later-stage investors are also aware many companies can get to break-even without raising big rounds of venture capital, and may simply choose to operate on their own cashflow, or perhaps debt-based financing. Thus, bigger funds may miss out on many “small” deals that break out early and/or get to profitability early.

Lastly, there is one other big trend that is likely to force larger VC funds out of consumer and small business internet services: monetization keeps getting better and better, and exits are getting earlier and more often. Altho internet payment services are still a big pain in the ass, in most of the US and EU it’s taken for granted you can pay online and have goods delivered to your door. While this isn’t the case yet in many big markets in Asia, India, Latin America, and Eastern Europe & the Middle East, give it another few years and it will become commonplace. And as online payments and monetization improves, again we will see less need for venture capital to finance customer acquisition for successful internet businesses. It just won’t be cost-effective for big VC to finance all the “little” startups that are going to be built on consumer commerce and small business services. There will be thousands of small wins, but larger funds can’t handle the scale required to do so many small investments. Maybe we need something like the SBA small business loan equivalent, but on the the equity side.

So for all of you folks ready to call it a day on investing in consumer internet, i’m happy to see you go… that just means less competition for those of us ready to really dig in and invest at scale in all the millions of new “small” businesses that will emerge and dominate the globe in coming years.

 
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