Saturday, November 12, 2011

Targeting the Fortune 5,000,000

I've just read on TechCrunch that Peter Thiel, famous among other things for making one of the best investments in the history of mankind by investing in Facebook in its early days, said that he looks for platforms that are big among small businesses, not consumers. I couldn't agree more. Although there are of course plenty of exciting and profitable opportunites for consumer Internet startups, my main focus over the last three years has been on companies that provide a product, service or platform to small and medium-sized businesses. Some of the reasons:

  • Consumer startups often (not always) need enormous scale in order to become profitable. This is particularly true for advertising-supported businesses where the ARPU (average revenue per user) is very low. That means that you need to raise a large amount of capital, and because it's usually a winner-takes-it-all model, you have to expect a "digital" outcome – either it becomes a big hit or you lose. There's nothing inherently wrong with that, but for me the threshold for making an investment like this is much higher than it is in a case where you can follow a lean startup approach and where the downside is more limited.
  • Most of the large, old software players are focused on, and in some cases trapped into, the classic enterprise software sales model of selling complex, on-premise software for extremely high prices using large sales forces. Neither the products nor the distribution strategy work well for SMBs, which creates huge opportunities for startups to fill the needs of the Fortune 5,000,000 with easy-to-use, on-demand, pay-as-you go SaaS applications. Examples from my portfolio: FreeAgent (online accounting for freelancers in the UK), inFakt (online accounting for SMBs in Poland), samedi (resource planning for doctors in Germany), Vend (Web-based POS system) and many others.
  • Over the last decade, the Internet entered almost every area of life and chances are that if you're looking for anything – ANYTHING – you'll do it online. It doesn't matter if you need a doctor, a haircut, a pizza, a taxi or a mechanic – either you're looking (and booking) online already or you will in a few years. More and more SMBs understand this, they know that being online is or will soon be critical to their business. This leads to huge opportunities for companies that help SMBs go and be found online. Portfolio examples: Lieferheld (restaurant delivery), DigitaleSeiten (online directories, e.g. for roofers), StyleSeat (platform for beauty professionales) and several others.
Finally, by targeting SMBs you can reap an "unsexyness dividend". Consumer startups are generally just sexier, which leads to more competition. There are dozens if not hundreds of photo sharing apps, but how many companies do you know that build an online directory for roofers? It might be an interesting idea for a research project to try if it's possible to quantify the "unsexyness dividend" – talk about sexyness-adjusted returns along the lines of risk-adjusted returns!

6 comments:

putt1ck said...

Except, as I pointed out to an angel investor who strictly limits himself to B2B investments, the engine of the economy is the consumer - eventually someone has to be selling to them or you can call the whole thing off!

Maybe the negativity should be reserved for consumer products that depend on advertising for revenue. That's a saturated market that is now highly competitive; in reality the product of all such businesses is the volume of consumers and there's only so many consumers to go around...

Christoph Janz said...

Good points, but fortunately there's no shortage of investors wanting to invest in consumer Internet startups!

putt1ck said...

No shortage? I must be hanging out in the wrong places (country?) then!

I know of a few UK angels who have historically invested in consumer Internet startups but the vast majority of the ones I've talked to seem far more interested in B2B.

Emmanuel Bellity said...

"It might be an interesting idea for a research project to try if it's possible to quantify the "unsexyness dividend" – talk about sexyness-adjusted returns along the lines of risk-adjusted returns!"


Ha! If I was still in Grad School I'd probably take up on that project - very true indeed.


Example of a great, unsexy market that I know well : Hearing Aids.
Example of a very cool and sexy but very hard market : social music apps. Even Turntable.fm which was a "hit" at some point and an awesome product practically didn't make any money...

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Roger Lightfoot said...

"Unsexy" - I could not agree more. We chose to build a product in a really dull area (administration of your office and staff) because we decided that is was so unsexy and boring that few others would enter this market. Our research backed this up (most SME business owners feel the pain here) and we are about to launch our first MVP to test product / market fit. Here goes!


By the way we are building a simple system around a clever shared business calendar including the automation of staff holidays / leave and meeting room bookings and important reminders Etc. There's more at http://www.fabmin.com.