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!