You need a million users to raise a (consumer) seed round

14 Jun 2013

  


This post focuses on how the consumer-mobile funding landscape has changed over the past year. It includes what I believe to be fairly accurate numbers and guidelines for entrepreneurs without serious track records, as well as my own conclusions on the future of consumer-mobile apps.

A brief funding landscape timeline

  • Seed round traction for a consumer app has gone from 10,000 users to nearly 1,000,000 users in the past year or so. If you are doing 1,000+ organic downloads a day, you are in a pretty good position to be raising a seed round.

  • Lots of investors made pre-traction mobile-consumer bets in early 2011. Some even built up teams of 5 or 6 people before having launched a product.

  • In late 2011 and early 2012, savvy investors quickly noticed that many consumer apps started to stagnate around 300-500K total users. Although their total user counts continued to grow, their active user count did not (often only reaching a few tens of thousands monthly active users) – some even had exponential decay.

  • Facebook’s May 2012 IPO spooked a lot of investors because other consumer startups could use Facebook’s valuation as a benchmark – a gold standard. When’s it’s stock price was nearly halved, the valuations of many other consumer companies were up in the air. Facebook’s IPO flop definitely played a role in the decrease of pre-traction consumer investments in from 2011 to 2012.

  • A series of high profile blog posts and commentary in late November 2012 prompted a lot of investors to completely rethink their consumer strategy. Eg. Fred Wilson’s What has Changed, YC decreasing the amount invested and cutting down it’s class size, Techcrunch’s R.I.P. Frothy Times, The Wall Street Journal’s VCs Still Chasing Web Companies, But With Less Cash, etc. Many investors stopped making bets in the space because they didn’t want to look bad if their companies failed.

  • It’s halfway through 2013 and the winter of consumer companies is upon us. Many companies are being shut down, some are being acquired with no ROI, and a handful are being bought by a Silicon Valley giant trying to make a resurgence. On another note, Path is likely spending millions of dollars to artificially inflate their ranking in the App Store in hopes of being acquired. It looks quite obvious to anyone with a feel for App Store dynamics, but here’s an article if you aren’t.

  • Right now investors will still look at new consumer deals if they seem interesting, but in general will only invest in first time founders if they have crazy traction or someone with clout champions them and their company. Eg. YC, Obvious Corp, a big name tech founder, etc. Social proof can be very valuable for a first time entrepreneur, but even some of the conventional incubator channels have become underwhelming and don’t guarantee success.

My thoughts on the future of consumer seed funding

Companies that have massive traction will still be able to raise seed rounds without much trouble. Although chat apps are hot with investors right now due to their inherent viral nature, recall that services like AIM, ICQ, and MSN Messenger all faded away with regards to usage.

In the near future, investors would rather provide bridge financing for founders and companies they have already invested in, or wait to see what happens to companies with a few hundred thousand users before investing in new companies with less than 100K users.

In the next 6 to 12 months, many companies with a few hundred thousand users or less, little growth, and teams of 5 or 6 will fail as they will be unable to raise bridge financing or a Series A.

Seed stage investors may hold off new consumer investments for a while after that, but will eventually start making consumer bets again. People will remember that building a big B2B startup is not easy, and although they can become sustainable businesses, they will not create the big exits that winning consumer companies do. Being the “first investor” in the next Facebook, Twitter, or Pinterest has a lot of cache – investors like Chris Sacca and Peter Thiel are known for their early investments in Twitter and Facebook respectively, not their safer bets.

These are mostly my opinions and based on experiences I’ve had with Backspaces. I’d love to hear your thoughts if you disagree.


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